**UNITED STATES**

**SECURITIES AND EXCHANGECOMMISSION**

**WASHINGTON, D.C. 20549**

 

----

 

**FORM 10-Q**

 

| **(Mark One)** | ** **                                                                                               |
|----------------|----------------------------------------------------------------------------------------------------------|
| ** **     | ** **                                                                                               |
| **x**          | **Quarterly Report  Pursuant to Section 13 or 15(d) of the Securities Exchange Act of  1934**  |
| ** **     | ** **                                                                                               |
| ** **     | ** **                                                                                               | **For the quarterly period ended June 30, 2008 or** | ** ** |
| ** **     | ** **                                                                                               |
| **o**          | **Transition Report  Pursuant to Section 13 or 15(d) of the Securities Exchange Act of  1934** |
| ** **     | ** **                                                                                               |
| ** **     | ** **                                                                                               | **For the transition period from                    to                    ** | ** ** |
| ** **     | ** **                                                                                               |
| ** **     | **Commission file number 1-16017**                                                                  |
|                |                                                                                                          |  |  |  |  |

 

**ORIENT-EXPRESS HOTELS LTD.**

(Exact name of registrant asspecified in its charter)

 

| **Bermuda**                   | ** ** | **98-0223493**      |
|-------------------------------|------------|---------------------|
| (State or other  jurisdiction |       | (I.R.S. Employer    |
| of incorporation or           |       | Identification No.) |
| organization)                 |       |                |

 

**22 Victoria Street**

**P.O. Box HM 1179**

**Hamilton HMEX, Bermuda**

(Address of principalexecutive offices)          (Zip Code)

 

**441–295–2244**

(Registrant’s telephonenumber, including area code)

 

Indicate by check mark whether the registrant (1) has filed allreports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days.  Yes x  No o

 

Indicate by check mark whether the registrant is a large acceleratedfiler, an accelerated filer, a non-accelerated filer, or a smaller reportingcompany.  (See definitions of “largeaccelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2of the Exchange Act).

 

| Large  accelerated filer x | Accelerated  filer o | Non-accelerated  filer o                        | Smaller  reporting company o |
|---------------------------------|---------------------------|-------------------------------------------------|-----------------------------------|
|                            |                      | (Do not check  if a smaller  reporting company) |                              |

 

 

Indicate by check mark whether the registrant is a shell company (asdefined in Rule 12b-2 of the Exchange Act).  Yes o  No x

 

As of July 31, 2008, 42,469,500 Class A common shares and18,044,478 Class B common shares of Orient-Express Hotels Ltd. wereoutstanding. All of the Class B shares are owned by a subsidiary ofOrient-Express Hotels Ltd.

 

 

 

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** **

**PART I —FINANCIAL INFORMATION**

 

**ITEM 1.  Financial Statements**

 

**Orient-ExpressHotels Ltd. and Subsidiaries**

 

**CondensedConsolidated Balance Sheets (unaudited)**

 
| ** **                                                                                                      | ** ** | **June 30,  2008**    | ** ** | **December 31,  2007** | ** ** |
|-----------------------------------------------------------------------------------------------------------------|------------|----------------------------|------------|-----------------------------|------------|
| ** **                                                                                                      | ** ** | **(Dollars in thousands)** | ** ** |
| **Assets**                                                                                                      | ** ** | ** **                 | ** ** | ** **                  | ** ** |
| Cash  and cash equivalents                                                                                      |       | $                          | 65,849     |                        | $          | 90,565 |   |
| Restricted  cash                                                                                                |       | 7,494                      |       | 3,800                       |       |
| Accounts  receivable, net of allowances of $1,315 and $1,292                                                    |       | 82,179                     |       | 62,847                      |       |
| Due  from related parties                                                                                       |       | 27,193                     |       | 30,406                      |       |
| Prepaid  expenses and other                                                                                     |       | 22,004                     |       | 16,115                      |       |
| Inventories                                                                                                     |       | 51,843                     |       | 45,756                      |       |
| Assets  of discontinued operations held for sale                                                                |       | 58,431                     |       | 54,417                      |       |
| Real  estate assets                                                                                             |       | 47,096                     |       | 57,157                      |       |
| Total  current assets                                                                                           |       | 362,089                    |       | 361,063                     |       |
|                                                                                                            |       |                       |       |                        |       |
| Property,  plant and equipment, net of accumulated depreciation of $260,759 and $268,297                        |       | 1,365,745                  |       | 1,273,956                   |       |
| Investments                                                                                                     |       | 157,128                    |       | 147,539                     |       |
| Goodwill                                                                                                        |       | 138,356                    |       | 133,497                     |       |
| Other  intangible assets, net                                                                                   |       | 21,679                     |       | 21,660                      |       |
| Other  assets                                                                                                   |       | 53,558                     |       | 50,722                      |       |
|                                                                                                            |       | $                          | 2,098,555  |                        | $          | 1,988,437 |   |
| **Liabilities and Shareholders’ Equity**                                                                   |       |                       |       |                        |       |
| Working  capital facilities                                                                                     |       | $                          | 64,504     |                        | $          | 64,419 |   |
| Accounts  payable                                                                                               |       | 35,978                     |       | 30,132                      |       |
| Accrued  liabilities                                                                                            |       | 71,867                     |       | 62,246                      |       |
| Deferred  revenue                                                                                               |       | 51,119                     |       | 35,545                      |       |
| Liabilities  of discontinued operations held for sale                                                           |       | 5,313                      |       | 5,619                       |       |
| Current  portion of long-term debt and capital leases                                                           |       | 115,779                    |       | 127,795                     |       |
| Total  current liabilities                                                                                      |       | 344,560                    |       | 325,756                     |       |
|                                                                                                            |       |                       |       |                        |       |
| Long-term  debt and obligations under capital leases                                                            |       | 719,406                    |       | 658,615                     |       |
| Liability  for pension benefit                                                                                  |       | 6,933                      |       | 6,935                       |       |
| Other  liabilities                                                                                              |       | 3,693                      |       | 3,709                       |       |
| Deferred  income taxes                                                                                          |       | 120,479                    |       | 119,112                     |       |
| Liability  for uncertain tax positions                                                                          |       | 26,189                     |       | 24,025                      |       |
|                                                                                                            |       | 1,221,260                  |       | 1,138,152                   |       |
| Commitments  and contingencies                                                                                  |       |                       |       |                        |       |
| Minority  interest                                                                                              |       | 2,022                      |       | 1,754                       |       |
|                                                                                                            |       |                       |       |                        |       |
| Shareholders’  equity:                                                                                     |       |                       |       |                        |       |
| Preferred  shares $0.01 par value (30,000,000 shares authorized, issued nil)                                    |       | —                     |       | —                      |       |
| Class A  common shares $0.01 par value (120,000,000 shares authorized):                                    |       |                       |       |                        |       |
| Issued  — 42,469,500 (2007 — 42,456,000)                                                              |       | 425                        |       | 424                         |       |
| Class B  common shares $0.01 par value (120,000,000 shares authorized):                                    |       |                       |       |                        |       |
| Issued  — 18,044,478 (2007 — 18,044,478)                                                              |       | 181                        |       | 181                         |       |
| Additional  paid-in capital                                                                                     |       | 517,030                    |       | 515,307                     |       |
| Retained  earnings                                                                                              |       | 315,372                    |       | 302,369                     |       |
| Accumulated  other comprehensive income                                                                         |       | 42,446                     |       | 30,431                      |       |
| Less:  reduction due to class B common shares owned by a subsidiary — 18,044,478  (2007 — 18,044,478) |       | (181                       | )          | (181                        | )          |
| Total  shareholders’ equity                                                                                |       | 875,273                    |       | 848,531                     |       |
|                                                                                                            |       | $                          | 2,098,555  |                        | $          | 1,988,437 |   |

 

See notes tocondensed consolidated financial statements.

 

2

----

 

**Orient-ExpressHotels Ltd. and Subsidiaries**

 

**Statementsof Condensed Consolidated Operations (unaudited)**

 
| **Three months ended June 30,**                                     | ** ** | **2008**                                             | ** ** | **2007**   | ** ** |
|--------------------------------------------------------------------------|------------|------------------------------------------------------|------------|------------|------------|
| ** **                                                               | ** ** | **(Dollars in thousands, except per share amounts)** | ** ** |
| ** **                                                               | ** ** | ** **                                           | ** ** | ** ** | ** ** |
| Revenue                                                                  |       | $                                                    | 181,356    |       | $          | 159,457 |   |
|                                                                     |       |                                                 |       |       |       |
| Expenses:                                                                |       |                                                 |       |       |       |
| Depreciation  and amortization                                           |       | 10,282                                               |       | 9,757      |       |
| Operating                                                                |       | 85,796                                               |       | 71,958     |       |
| Selling,  general and administrative                                     |       | 50,829                                               |       | 43,217     |       |
| Total  expenses                                                          |       | 146,907                                              |       | 124,932    |       |
|                                                                     |       |                                                 |       |       |       |
| Earnings  from operations                                                |       | 34,449                                               |       | 34,525     |       |
|                                                                     |       |                                                 |       |       |       |
| Interest  expense, net                                                   |       | (11,461                                              | )          | (10,910    | )          |
| Foreign  currency, net                                                   |       | 2,617                                                |       | 1,151      |       |
| Net  finance costs                                                       |       | (8,844                                               | )          | (9,759     | )          |
|                                                                     |       |                                                 |       |       |       |
| Earnings  before income taxes and earnings from unconsolidated companies |       | 25,605                                               |       | 24,766     |       |
|                                                                     |       |                                                 |       |       |       |
| Provision  for income taxes                                              |       | (9,722                                               | )          | (8,759     | )          |
|                                                                     |       |                                                 |       |       |       |
| Earnings  before earnings from unconsolidated companies                  |       | 15,883                                               |       | 16,007     |       |
| Earnings  from unconsolidated companies, net of tax                      |       | 5,838                                                |       | 4,234      |       |
|                                                                     |       |                                                 |       |       |       |
| Net  earnings from continuing operations                                 |       | 21,721                                               |       | 20,241     |       |
|                                                                     |       |                                                 |       |       |       |
| Losses  from discontinued operations, net of tax                         |       | (2,257                                               | )          | (538       | )          |
|                                                                     |       |                                                 |       |       |       |
| Net  earnings                                                            |       | $                                                    | 19,464     |       | $          | 19,703 |   |
|                                                                     |       |                                                 |       |       |       |
| Net  earnings per share, basic and diluted:                              |       |                                                 |       |       |       |
| Net  earnings from continuing operations                                 |       | $                                                    | 0.51       |       | $          | 0.47 |   |
| Net  earnings from discontinued operations                               |       | (0.05                                                | )          | (0.01      | )          |
| Net  earnings                                                            |       | $                                                    | 0.46       |       | $          | 0.46 |   |
|                                                                     |       |                                                 |       |       |       |
| Dividends  per share                                                     |       | $                                                    | 0.025      |       | $          | 0.025 |   |

 

See notes tocondensed consolidated financial statements.

 

3

----

 

 

**Orient-ExpressHotels Ltd. and Subsidiaries**

 

**Statementsof Condensed Consolidated Operations (unaudited)**

 
| **Six months ended June 30,**                                       | ** ** | **2008**                                             | ** ** | **2007**   | ** ** |
|--------------------------------------------------------------------------|------------|------------------------------------------------------|------------|------------|------------|
| ** **                                                               | ** ** | **(Dollars in thousands, except per share amounts)** | ** ** |
| ** **                                                               | ** ** | ** **                                           | ** ** | ** ** | ** ** |
| Revenue                                                                  |       | $                                                    | 296,036    |       | $          | 253,626 |   |
|                                                                     |       |                                                 |       |       |       |
| Expenses:                                                                |       |                                                 |       |       |       |
| Depreciation  and amortization                                           |       | 20,566                                               |       | 18,532     |       |
| Operating                                                                |       | 145,489                                              |       | 120,070    |       |
| Selling,  general and administrative                                     |       | 94,647                                               |       | 77,590     |       |
| Total  expenses                                                          |       | 260,702                                              |       | 216,192    |       |
|                                                                     |       |                                                 |       |       |       |
| Earnings  from operations                                                |       | 35,334                                               |       | 37,434     |       |
|                                                                     |       |                                                 |       |       |       |
| Interest  expense, net                                                   |       | (24,390                                              | )          | (21,448    | )          |
| Foreign  currency, net                                                   |       | 4,662                                                |       | 1,253      |       |
| Net  finance costs                                                       |       | (19,728                                              | )          | (20,195    | )          |
|                                                                     |       |                                                 |       |       |       |
| Earnings  before income taxes and earnings from unconsolidated companies |       | 15,606                                               |       | 17,239     |       |
|                                                                     |       |                                                 |       |       |       |
| Provision  for income taxes                                              |       | (6,165                                               | )          | (6,031     | )          |
|                                                                     |       |                                                 |       |       |       |
| Earnings  before earnings from unconsolidated companies                  |       | 9,441                                                |       | 11,208     |       |
| Earnings  from unconsolidated companies, net of tax                      |       | 9,905                                                |       | 6,537      |       |
|                                                                     |       |                                                 |       |       |       |
| Net  earnings from continuing operations                                 |       | 19,346                                               |       | 17,745     |       |
|                                                                     |       |                                                 |       |       |       |
| Losses  from discontinued operations, net of tax                         |       | (4,220                                               | )          | (1,723     | )          |
|                                                                     |       |                                                 |       |       |       |
| Net  earnings                                                            |       | $                                                    | 15,126     |       | $          | 16,022 |   |
|                                                                     |       |                                                 |       |       |       |
| Net  earnings per share, basic:                                          |       |                                                 |       |       |       |
| Net  earnings from continuing operations                                 |       | $                                                    | 0.46       |       | $          | 0.42 |   |
| Net  earnings from discontinued operations                               |       | (0.10                                                | )          | (0.04      | )          |
| Net  earnings                                                            |       | $                                                    | 0.36       |       | $          | 0.38 |   |
|                                                                     |       |                                                 |       |       |       |
| Net  earnings per share, diluted:                                        |       |                                                 |       |       |       |
| Net  earnings from continuing operations                                 |       | $                                                    | 0.45       |       | $          | 0.42 |   |
| Net  earnings from discontinued operations                               |       | (0.10                                                | )          | (0.04      | )          |
| Net  earnings                                                            |       | $                                                    | 0.35       |       | $          | 0.38 |   |
|                                                                     |       |                                                 |       |       |       |
| Dividends  per share                                                     |       | $                                                    | 0.05       |       | $          | 0.05 |   |

 

See notes tocondensed consolidated financial statements.

 

4

----

 

**Orient-ExpressHotels Ltd. and Subsidiaries**

 

**Statementsof Condensed Consolidated Cash Flows (unaudited)**

 
| **Six months ended June 30,**                                                 | ** ** | **2008**                   | ** ** | **2007** | ** ** |
|------------------------------------------------------------------------------------|------------|----------------------------|------------|----------|------------|
| ** **                                                                         | ** ** | **(Dollars in thousands)** | ** ** |
| Cash  flows from operating activities:                                             |       |                       |       |     |       |
| Net  earnings from continuing operations                                           |       | $                          | 19,346     |     | $          | 17,745 |   |
| Adjustments  to reconcile net earnings to net cash used in operating activities:   |       |                       |       |     |       |
| Depreciation  and amortization                                                     |       | 20,566                     |       | 18,532   |       |
| Amortization  of finance costs                                                     |       | 1,669                      |       | 1,630    |       |
| Undistributed  earnings of affiliates                                              |       | (6,521                     | )          | (3,371   | )          |
| Dividends  received from unconsolidated companies                                  |       | 3,780                      |       | —   |       |
| Stock-based  compensation                                                          |       | 1,531                      |       | 779      |       |
| Change  in deferred tax                                                            |       | 1,072                      |       | 674      |       |
| Losses/(gains)  from disposals of fixed assets                                     |       | 140                        |       | (322     | )          |
| Other  non-cash items                                                              |       | (1,691                     | )          | (607     | )          |
| Change  in assets and liabilities net of effects from acquisition of subsidiaries: |       |                       |       |     |       |
| Increase  in receivables, prepaid expenses and other                               |       | (19,120                    | )          | (19,948  | )          |
| Increase  in inventories                                                           |       | (4,902                     | )          | (3,074   | )          |
| Increase  in real estate assets held for sale                                      |       | (20,282                    | )          | (9,910   | )          |
| Increase  in payables, accrued liabilities and deferred revenue                    |       | 29,796                     |       | 24,393   |       |
|                                                                               |       |                       |       |     |       |
| Total  adjustments                                                                 |       | 6,038                      |       | 8,776    |       |
|                                                                               |       |                       |       |     |       |
| Net  cash provided by operating activities from continuing operations              |       | 25,384                     |       | 26,521   |       |
| Net  cash used in operating activities from discontinued operations                |       | (3,132                     | )          | (1,120   | )          |
|                                                                               |       |                       |       |     |       |
| Net  cash provided by operating activities                                         |       | 22,252                     |       | 25,401   |       |
|                                                                               |       |                       |       |     |       |
| Cash  flows from investing activities:                                             |       |                       |       |     |       |
| Capital  expenditures                                                              |       | (50,200                    | )          | (45,675  | )          |
| Acquisitions  and investments, net of cash acquired                                |       | (3,316                     | )          | (20,339  | )          |
| Increase  in restricted cash                                                       |       | (3,694                     | )          | —   |       |
| Proceeds  from sale of fixed assets and investments                                |       | 158                        |       | 1,227    |       |
|                                                                               |       |                       |       |     |       |
| Net  cash used in investing activities from continuing operations                  |       | (57,052                    | )          | (64,787  | )          |
| Net  cash used in investing activities from discontinued operations                |       | (1,078                     | )          | (933     | )          |
|                                                                               |       |                       |       |     |       |
| Net  cash used in investing activities                                             |       | (58,130                    | )          | (65,720  | )          |
|                                                                                    |            |                            |            |          |            |  |  |

 

5

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**Orient-Express Hotels Ltd. and Subsidiaries**

** **

**Statements of Condensed Consolidated CashFlows (unaudited) (continued)**

 
| **Six months ended June 30,**                                                                                            | ** ** | **2008**                   | ** ** | **2007** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------|------------|----------------------------|------------|----------|------------|
| ** **                                                                                                               | ** ** | **(Dollars in thousands)** | ** ** |
| Cash  flows from financing activities:                                                                                   |       |                       |       |     |       |
| Net  proceeds from working capital facilities and redrawable loans                                                       |       | 28,324                     |       | 46,715   |       |
| Stock  options exercised                                                                                                 |       | 193                        |       | 3,811    |       |
| Issuance  of long-term debt                                                                                              |       | 3,015                      |       | 12,170   |       |
| Principal  payments under long-term debt                                                                                 |       | (18,536                    | )          | (13,240  | )          |
| Payment  of common share dividends                                                                                       |       | (2,123                     | )          | (2,117   | )          |
|                                                                                                                     |       |                       |       |     |       |
| Net  cash provided by financing activities                                                                               |       | 10,873                     |       | 47,339   |       |
|                                                                                                                     |       |                       |       |     |       |
| Effect  of exchange rate changes on cash and cash equivalents                                                            |       | 178                        |       | 467      |       |
|                                                                                                                     |       |                       |       |     |       |
| Net  (decrease)/increase in cash and cash equivalents                                                                    |       | (24,827                    | )          | 7,487    |       |
|                                                                                                                     |       |                       |       |     |       |
| Cash  and cash equivalents at beginning of period (includes $360 (2008), $1,422  (2007) of discontinued operations cash) |       | 90,925                     |       | 79,318   |       |
|                                                                                                                     |       |                       |       |     |       |
| Cash  and cash equivalents at end of period (includes $249 (2008), $120 (2007) of  discontinued operations cash)         |       | $                          | 66,098     |     | $          | 86,805 |   |
|                                                                                                                          |            |                            |            |          |            |  |  |

 

See notes to condensed consolidated financial statements.

 

6

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**Orient-Express Hotels Ltd.and Subsidiaries**

 

**Statements of CondensedConsolidated Shareholders’ Equity (unaudited)**

 
| **(Dollars  in thousands)**    | ** ** | **Preferred  Shares  At Par  Value** | ** ** | **Class A  Common  Shares  at Par  Value** | ** ** | **Class B  Common  Shares  at Par  Value** | ** ** | **Additional  Paid-In  Capital** | ** ** | **Retained  Earnings** | ** ** | **Accumulated  Other  Comprehensive  Income/(Loss)** | ** ** | **Common  Shares  Owned by  Subsidiary** | ** ** | **Total  Comprehensive  Income** | ** ** |
|--------------------------------|------------|--------------------------------------|------------|-------------------------------------------------|------------|-------------------------------------------------|------------|----------------------------------|------------|------------------------|------------|------------------------------------------------------|------------|------------------------------------------|------------|----------------------------------|------------|
|                           |       |                                 |       |                                            |       |                                            |       |                             |       |                   |       |                                                 |       |                                     |       |                             |       |
| Balance,  January 1, 2007 |       | $                                    | —     |                                            | $          | 422                                             |       | $                                | 181        |                   | $          | 509,762                                              |       | $                                        | 301,785    |                             | $          | (4,973 | ) | $ | (181 | ) |   |   |
| FIN48  liabilities             |       | —                               |       | —                                          |       | —                                          |       | —                           |       | (28,820                | )          | —                                               |       | —                                   |       |                             |       |
| Stock-based  compensation      |       | —                               |       | —                                          |       | —                                          |       | 779                              |       | —                 |       | —                                               |       | —                                   |       |                             |       |
| Stock  options exercised       |       | —                               |       | 2                                               |       | —                                          |       | 3,809                            |       | —                 |       | —                                               |       | —                                   |       |                             |       |
| Dividends  on common shares    |       | —                               |       | —                                          |       | —                                          |       | —                           |       | (2,117                 | )          | —                                               |       | —                                   |       |                             |       |
| Comprehensive  income:         |       |                                 |       |                                            |       |                                            |       |                             |       |                   |       |                                                 |       |                                     |       |                             |       |
| Net  earnings                  |       | —                               |       | —                                          |       | —                                          |       | —                           |       | 16,022                 |       | —                                               |       | —                                   |       | $                                | 16,022     |   |
| Other  comprehensive income    |       | —                               |       | —                                          |       | —                                          |       | —                           |       | —                 |       | 20,243                                               |       | —                                   |       | 20,243                           |       |
|                           |       |                                 |       |                                            |       |                                            |       |                             |       |                   |       |                                                 |       |                                     |       | $                                | 36,265     |   |
| Balance,  June 30, 2007   |       | $                                    | —     |                                            | $          | 424                                             |       | $                                | 181        |                   | $          | 514,350                                              |       | $                                        | 286,870    |                             | $          | 15,270 |   | $ | (181 | ) |   |   |
|                           |       |                                 |       |                                            |       |                                            |       |                             |       |                   |       |                                                 |       |                                     |       |                             |       |
| Balance,  January 1, 2008 |       | $                                    | —     |                                            | $          | 424                                             |       | $                                | 181        |                   | $          | 515,307                                              |       | $                                        | 302,369    | *                                | $          | 30,431 |   | $ | (181 | ) |   |   |
| Stock-based  compensation      |       | —                               |       | —                                          |       | —                                          |       | 1,531                            |       | —                 |       | —                                               |       | —                                   |       |                             |       |
| Stock  options exercised       |       | —                               |       | 1                                               |       | —                                          |       | 192                              |       | —                 |       | —                                               |       | —                                   |       |                             |       |
| Dividends  on common shares    |       | —                               |       | —                                          |       | —                                          |       | —                           |       | (2,123                 | )          | —                                               |       | —                                   |       |                             |       |
| Comprehensive  income:         |       |                                 |       |                                            |       |                                            |       |                             |       |                   |       |                                                 |       |                                     |       |                             |       |
| Net  earnings                  |       | —                               |       | —                                          |       | —                                          |       | —                           |       | 15,126                 |       | —                                               |       | —                                   |       | $                                | 15,126     |   |
| Other  comprehensive income    |       | —                               |       | —                                          |       | —                                          |       | —                           |       | —                 |       | 12,015                                               |       | —                                   |       | 12,015                           |       |
|                           |       |                                 |       |                                            |       |                                            |       |                             |       |                   |       |                                                 |       |                                     |       | $                                | 27,141     |   |
| Balance,  June 30, 2008   |       | $                                    | —     |                                            | $          | 425                                             |       | $                                | 181        |                   | $          | 517,030                                              |       | $                                        | 315,372    |                             | $          | 42,446 |   | $ | (181 | ) |   |   |

 

See notes tocondensed consolidated financial statements.

----

*  This amount differs from $304,412 shown inthe 2007 SEC Form 10-K annual report due to the correction of a typographicalerror.

 

7

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**Orient-ExpressHotels Ltd. and Subsidiaries**

 

**Notesto Condensed Consolidated Financial Statements**

 

**1.             Basis of financial statementpresentation**

 

In this reportOrient-Express Hotels Ltd. is referred to as the “Company”, and the Company andits subsidiaries are referred to collectively as “OEH”.

 

*(a) **Accountingpolicies*

 

Theaccompanying condensed consolidated financial statements have been preparedpursuant to the rules and regulations of the US Securities and  Exchange Commission for reporting on Form 10-Q.  Accordingly, they do not include all of theinformation and footnotes required by US generally accepted accountingprinciples for complete financial statements. In the opinion of the management of the Company, all adjustments(consisting of normal recurring adjustments) necessary for a fair presentationof financial position, operating results and cash flows have been included inthe statements.  Interim results are notnecessarily indicative of results that may be expected for the year ending December 31,2008.  These financial statements shouldbe read in conjunction with the consolidated financial statements and footnotesthereto included in the Company’s periodic filings, including the Company’sAnnual Report on Form 10-K for the year ended December 31, 2007.  See Note 1 to the consolidated financialstatements in the 2007 Form 10-K for additional information regardingsignificant accounting policies.

 

The accountingpolicies used in preparing these financial statements are the same as thoseapplied in the prior year except for the presentation of restricted cash, theimplementation of accounting for performance-based share awards, the adoptionof SFAS No. 157 and 159, the reclassification of certain assets previouslyheld for sale, and the accounting for hedges of net investments in foreignoperations, in the six months ended June 30, 2008.

 

*Restrictedcash*

 

In thestatements of condensed consolidated cash flows for the six months ended June 30,2008, changes in restricted cash balances have been reported in investingactivities.  There were no changes inrestricted cash balances in the six months ended June 30, 2007. Therestricted cash of $3,800,000 at December 31, 2007 has been reclassified from cashand cash equivalents.

 

8

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*Performancestock-based compensation accounting policy*

 

Under its 2007performance share plan, the Company granted share-based payment awards withperformance and market conditions to certain employees during the six monthsended June 30, 2008.

 

The fair valueof the awards at the grant date is determined using the Monte Carlo model.  For awards with market conditions, theconditions are incorporated into the calculations, and the compensation valueis not adjusted if the conditions are not met. For awards with performance conditions, compensation expense isrecognized when it becomes probable that the performance criteria specified inthe awards will be achieved and, accordingly, the compensation value isadjusted following the changes in the estimates of shares likely to vest basedon the performance criteria.

 

Share-basedcompensation expense for the awards determined as described above is recognizedin earnings on a straight-line basis over the requisite service periods for theawards.  The total cost of a share-basedpayment award is reduced by estimated forfeitures expected to occur over thevesting period of the award.

 

*SFAS 157*

 

In September 2006, the FASB issued SFAS No. 157,“Fair Value Measurements”, which (i) applies to certain assets andliabilities that are being measured and reported on a fair value basis, (ii) definesfair value, establishes a framework for measuring fair value in accordance withgenerally accepted accounting principles, and expands disclosure about fairvalue measurements, and (iii) enables the reader of the financialstatements to assess the inputs to develop those measurements by establishing ahierarchy for ranking the quality and reliability of the information used todetermine fair values.

 

SFAS No. 157 requires that assets and liabilitiescarried at fair value be classified and disclosed in one of three categories,namely quoted market prices in active markets for identical assets orliabilities (Level 1), observable market-based inputs or unobservable inputsthat are corroborated by market data (Level 2), and unobservable inputs thatare not corroborated by market data (Level 3).

 

The Company adopted SFAS No. 157 effective January 1,2008, except as it applies to those non-financial assets and non-financialliabilities as noted in FSP FAS 157-2 described below.  There was no material impact on the Company’sfinancial statements from the adoption of the Standard.  The following 

 

9

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table summarizes the valuation of OEH’s assets andliabilities by the SFAS No. 157 fair value hierarchy at June 30, 2008(dollars in thousands):

 
| ** **                        | ** ** | **June 30, 2008** | ** ** |
|-----------------------------------|------------|------------------------|------------|
| ** **                        | ** ** | **Level 1**            | ** ** | **Level 2** | ** ** | **Level 3** | ** ** | **Total** | ** ** |
| Assets  at fair value:            |       |                   |       |   |   |   |   |   |   |
| Derivative  financial instruments |       | $                      | —     |   | $ | 6,270 |   | $ | — |   | $ | 6,270 |   |
| Total  assets                     |       | $                      | —     |   | $ | 6,270 |   | $ | — |   | $ | 6,270 |   |
|                              |       |                   |       |   |   |   |   |   |   |
| Liabilities  at fair value:       |       |                   |       |   |   |   |   |   |   |
| Derivative  financial instruments |       | $                      | —     |   | $ | 941 |   | $ | — |   | $ | 941 |   |
| Total  liabilities                |       | $                      | —     |   | $ | 941 |   | $ | — |   | $ | 941 |   |

 

The fair value of OEH’s derivative financialinstruments is computed based on a market approach using information generatedby market transactions involving comparable instruments.

 

In February 2008,the FASB issued proposed FSP FAS 157-2, which delayed the effective date ofSFAS No. 157 for all non-financial assets and non-financial liabilities,except for those that are recognized or disclosed at fair value in thefinancial statements on a recurring basis (at least annually).  FSP FAS 157-2 partially defers the effectivedate of SFAS No. 157 to fiscal years beginning after November 15,2008, and interim periods within those fiscal years for items within the scopeof the FSP.

 

*SFAS159*

 

The Companyadopted SFAS No. 159 “The Fair Value Option for Financial Assets andFinancial Liabilities”, which had no material impact on the Company’s financialstatements.

 

*Reclassificationof real estate assets*

 

As at June 30,2008, OEH has reclassified the villas under construction at La Samanna in St.Martin in the amount of $32,340,000 from real estate assets to owned fixedassets, as it has been decided not to market the villas actively for sale, butto operate them as part of the adjacent hotel.

 

*Hedgesof net investments in foreign operations*

 

Hedges of net investments in foreign operations areaccounted for similarly to cash flow hedges. Any gain or loss on the hedginginstrument relating to the effective portion of the hedge is recorded in othercomprehensive income within foreign currency translation adjustment. The gainor loss relating to the ineffective portion will be recognized immediately inearnings within foreign currency gains and losses. Gains and losses deferred inother comprehensive income are recognized in earnings upon disposal of theforeign operation. OEH links all hedges that are designated as net investmenthedges to specifically identified net investments in foreign subsidiaries.

 

*(b) Netearnings per share*

 

The number of shares used in computingbasic and diluted earnings per share was as follows (in thousands):

 

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| **Three months ended June 30,** | ** ** | **2008** | ** ** | **2007** | ** ** |
|--------------------------------------|------------|----------|------------|----------|------------|
|                                 |       |     |       |     |       |
| Basic                                |       | 42,469   |       | 42,400   |       |
| Effect  of dilution                  |       | 140      |       | 207      |       |
| Diluted                              |       | 42,609   |       | 42,607   |       |

 
| **Six months ended June 30,** | ** ** | **2008** | ** ** | **2007** | ** ** |
|------------------------------------|------------|----------|------------|----------|------------|
|                               |       |     |       |     |       |
| Basic                              |       | 42,468   |       | 42,329   |       |
| Effect  of dilution                |       | 152      |       | 199      |       |
| Diluted                            |       | 42,620   |       | 42,528   |       |

 

For thethree months ended June 30, 2008 and 2007, the anti-dilutive effect ofstock options on 51,591 and nil class A common shares, respectively, wasexcluded from the computation of diluted earnings per share.  For the six months ended June 30, 2008and 2007, the anti-dilutive effect of stock options on 32,783 and 157 class Acommon shares, respectively, was excluded from the computation of dilutedearnings per share.

 

*(c)  Dividends*

 

On January 4and April 4, 2008, the Company declared a dividend of $0.025 per commonshare payable February 5 and May 5, 2008, respectively, toshareholders of record on January 22 and April 21, 2008,respectively.

 

*(d)  Earnings fromunconsolidated companies*

 

Earnings fromunconsolidated companies include OEH’s share of the net earnings of its equityinvestments as well as interest income related to loans and advances to theequity investees amounting to $3,000,000 and $2,935,000 for the three monthsended June 30, 2008 and 2007, respectively, and $6,004,000 and $5,729,000for the six months ended June 30, 2008 and 2007, respectively.

 

****2.             Discontinuedoperations****

 

****During the fourthquarter of 2007, OEH decided to sell its investment in Bora Bora LagoonResort.  Accordingly, the results of thehotel have been presented as a discontinued operation for all the interimperiods presented.****

 

****Summarized operatingresults of the hotel are as follows (dollars in thousands):****

 

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**** ****

**** ****

| ****Three months ended June 30,****                   | ** **     | ****2008****   | ** **     | ****2007****   | ** **     |
|------------------------------------------------------------|----------------|----------------|----------------|----------------|----------------|
| **** ****                                             | **** **** | **** **** | **** **** | **** **** | **** **** |
| ****Revenue****                                            | **** **** | ****$****      | ****2,305****  | **** **** | ****$****      | ****2,897**** | **** **** |
| ****(Loss) from discontinued************operations****     | **** **** | ****$****      | ****(2,257**** | ****)****      | ****$****      | ****(538**** | ****)**** |
| ****Impairment loss****                                    | **** **** | ****—**** | **** **** | ****—**** | **** **** |
| ****Net (loss) from************discontinued operations**** | **** **** | ****$****      | ****(2,257**** | ****)****      | ****$****      | ****(538**** | ****)**** |

 

| ****Six months ended June 30,****                     | ** **     | ****2008****   | ** **     | ****2007****   | ** **     |
|------------------------------------------------------------|----------------|----------------|----------------|----------------|----------------|
| **** ****                                             | **** **** | **** **** | **** **** | **** **** | **** **** |
| ****Revenue****                                            | **** **** | ****$****      | ****3,916****  | **** **** | ****$****      | ****4,654**** | **** **** |
| ****(Loss) from discontinued************operations****     | **** **** | ****$****      | ****(4,220**** | ****)****      | ****$****      | ****(1,723**** | ****)**** |
| ****Impairment loss****                                    | **** **** | ****—**** | **** **** | ****—**** | **** **** |
| ****Net (loss) from************discontinued operations**** | **** **** | ****$****      | ****(4,220**** | ****)****      | ****$****      | ****(1,723**** | ****)**** |

 

****Due to an increase incompetition and other market factors, operating profits and cash flows of theBora Bora Lagoon Resort were lower than expected in 2007 and previous years,which gave rise to an impairment of goodwill and long-lived assets in theamount of $3,891,000 and $10,101,000, respectively, recorded in the quarterended December 31, 2007.  The fairvalue of the investment was estimated by management using a bid price offeredfor the business and considering other market factors.  The impaired book value remained the same asat June 30, 2008.****

 

****Assets and liabilitiesof the hotel have been classified as held for sale and consisted of thefollowing (dollars in thousands):****

**** ****

| **** ****                                                        | **** **** | ****June 30,********2008**** | **** **** | ****December 31,********2007**** | **** **** |
|-----------------------------------------------------------------------|----------------|-----------------------------------|----------------|---------------------------------------|----------------|
| **** ****                                                        | **** **** | **** ****                    | **** **** | **** ****                        | **** **** |
| ****Current assets****                                                | **** **** | ****$****                         | ****3,135****  | **** ****                        | ****$****      | ****3,686**** | **** **** |
| ****Other assets****                                                  | **** **** | ****3,112****                     | **** **** | ****3,121****                         | **** **** |
| ****Property, plant and equipment,************net of depreciation**** | **** **** | ****49,202****                    | **** **** | ****45,091****                        | **** **** |
| ****Goodwill****                                                      | **** **** | ****2,982****                     | **** **** | ****2,519****                         | **** **** |
| ****Total assets held for sale****                                    | **** **** | ****$****                         | ****58,431**** | **** ****                        | ****$****      | ****54,417**** | **** **** |
| ****Liabilities held for sale****                                     | **** **** | ****$****                         | ****(5,313**** | ****)****                             | ****$****      | ****(5,619**** | ****)**** |

 

 

 

 

12

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**3.             Acquisitions**

 

*Casa de Sierra Nevada minority interest*

 

On March 7, 2008, OEH agreed to accelerate the purchase of the 20%minority interest in Casa de Sierra Nevada it did not own for a cashconsideration of $2,329,000.  Followingguidance in SFAS No. 150, “Accounting for Certain Financial Instrumentswith Characteristics of both Liabilities and Equity”, and EITF 00-4, “Majorityowner’s accounting for a transaction in the shares of a consolidated subsidiaryand a derivative indexed to the minority interest in that subsidiary”, deferredconsideration of $2,330,000, which had been recorded on the originalacquisition of 80% was cleared and the difference of $1,000 between the finalsettlement and original forward contract value was recorded in earnings asinterest income.

 

*LaSamanna spa*

 

On March 14, 2008, the subsidiary of OEH that owns La Samannaagreed to terminate the existing lease with the third party operator of the spaon the hotel’s premises and to transfer the employees, equipment and otherassets of the spa to La Samanna effective April 1, 2008 for a cashconsideration of $650,000.

 

The following table summarizes the preliminary fair values of theassets acquired at the date of acquisition (dollars in thousands):

 

| ** **                     | ** ** | **April 1,  2008** | ** ** |
|--------------------------------|------------|-------------------------|------------|
|                           |       |                    |       |
| Inventory                      |       | $                       | 10         |   |
| Property,  plant and equipment |       | 10                      |       |
| Goodwill                       |       | 630                     |       |
| Other  intangible assets       |       | —                  |       |
| Total  assets acquired         |       | 650                     |       |
| Total  liabilities assumed     |       | —                  |       |
| Net  assets acquired           |       | $                       | 650        |   |
|                           |       |                    |       |
| Cash  consideration            |       | $                       | 650        |   |

 

Equipment of the spa has been fair valued based on the estimatedreplacement cost.  Goodwill of $630,000has been recorded of which $nil will be deductible as operating expenses fortax purposes.  This acquisition enabledOEH to take control of the spa operation and receive 100% of operating revenuesthat the business is expected to generate in future years, which contributed tothe purchase price and resulted in goodwill.

 

 

 

 

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The acquisition of the spa has been accounted for as a purchase inaccordance with SFAS No. 141, “Business Combinations”.  The results of the operation have beenincluded in the consolidated financial statements of OEH from March 14,2008.

 

**4.             Investments**

 

Summarized financial data for OEH’s unconsolidatedcompanies for the periods during which the investments were held by OEH are asfollows (dollars in thousands):

 

| ** **                                       | ** ** | **June 30,  2008** | ** ** | **December 31,  2007** | ** ** |
|--------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| ** **                                       | ** ** | ** **              | ** ** | ** **                  | ** ** |
| Current  assets                                  |       | $                       | 53,896     |                        | $          | 60,890 |   |
| Property,  plant and equipment, net              |       | 374,374                 |       | 358,708                     |       |
| Other  assets                                    |       | 54,332                  |       | 51,376                      |       |
| Total  assets                                    |       | $                       | 482,602    |                        | $          | 470,974 |   |
|                                             |       |                    |       |                        |       |
| Current  liabilities                             |       | $                       | 48,924     |                        | $          | 48,710 |   |
| Long-term  debt                                  |       | 250,738                 |       | 246,420                     |       |
| Other  liabilities                               |       | 99,809                  |       | 97,663                      |       |
| Total  shareholders’ equity                 |       | 83,131                  |       | 78,181                      |       |
| Total  liabilities and shareholders’ equity |       | $                       | 482,602    |                        | $          | 470,974 |   |

 

|                                               |       |     |       |     |       |
|----------------------------------------------------|------------|----------|------------|----------|------------|
| **Three  months ended June 30,**              | ** ** | **2008** | ** ** | **2007** | ** ** |
|                                               |       |     |       |     |       |
| Revenue                                            |       | $        | 58,142     |     | $          | 51,550 |   |
| Earnings  from operations before net finance costs |       | $        | 14,933     |     | $          | 12,390 |   |
| Net  earnings                                      |       | $        | 5,581      |     | $          | 3,270 |   |

 

|                                               |       |     |       |     |   |
|----------------------------------------------------|------------|----------|------------|----------|--------|
| **Six months ended June 30,**                 | ** ** | **2008** | ** ** | **2007** |   |
|                                               |       |     |       |     |   |
| Revenue                                            |       | $        | 108,222    |     | $      | 93,387 |   |
| Earnings  from operations before net finance costs |       | $        | 25,319     |     | $      | 19,115 |   |
| Net  earnings                                      |       | $        | 7,950      |     | $      | 2,756 |   |

 

 

 

 

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** **

 

**5.             Property, plant and equipment**

 

The major classes of property, plant andequipment are as follows (dollars in thousands):

 

| ** **                               | ** ** | **June 30,  2008** | ** ** | **December 31,  2007** | ** ** |
|------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| Land  and buildings                      |       | $                       | 1,168,887  |                        | $          | 1,074,059 |   |
| Machinery  and equipment                 |       | 221,341                 |       | 205,873                     |       |
| Fixtures,  fittings and office equipment |       | 230,245                 |       | 220,664                     |       |
| River  cruiseship and canalboats         |       | 13,569                  |       | 19,600                      |       |
|                                     |       | 1,634,042               |       | 1,520,196                   |       |
| Less:  accumulated depreciation          |       | (268,297                | )          | (246,240                    | )          |
|                                     |       | $                       | 1,365,745  |                        | $          | 1,273,956 |   |

 

The majorclasses of assets under capital leases included above are as follows (dollarsin thousands):

 

| ** **                               | ** ** | **June 30,  2008** | ** ** | **December 31,  2007** | ** ** |
|------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| Freehold  and leased land and buildings  |       | $                       | 19,083     |                        | $          | 17,948 |   |
| Machinery  and equipment                 |       | 2,675                   |       | 2,573                       |       |
| Fixtures,  fittings and office equipment |       | 1,766                   |       | 1,654                       |       |
|                                     |       | 23,524                  |       | 22,175                      |       |
| Less:  accumulated depreciation          |       | (3,382                  | )          | (2,953                      | )          |
| ** **                               |       | $                       | 20,142     |                        | $          | 19,222 |   |

 

**6.             Goodwill**

 

Thechanges in the carrying amount of goodwill for the six months ended June 30,2008 are as follows (dollars in thousands):

 
| ** **                                                         | ** ** | **Hotels &  Restaurants** | ** ** | **Trains &  Cruises** | ** ** | **Total** | ** ** |
|--------------------------------------------------------------------|------------|------------------------------------|------------|--------------------------------|------------|-----------|------------|
| Balance  as of January 1, 2008                                |       | $                                  | 124,909    |                           | $          | 8,588     |       | $ | 133,497 |   |
| Goodwill  acquired during the year/(prior year estimates adjusted) |       | 1,625                              |       | —                         |       | 1,625     |       |
| Foreign  currency translation adjustment                           |       | 3,245                              |       | (11                            | )          | 3,234     |       |
| Balance  as at June 30, 2008                                  |       | $                                  | 129,779    |                           | $          | 8,577     |       | $ | 138,356 |   |

 

 

 

 

 

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**7.             Other intangible assets**

**               **(Dollars in thousands)

 

| ** **                      | ** ** | **June 30, 2008** | ** ** |
|---------------------------------|------------|------------------------|------------|
| **Amortized intangible assets** | ** ** | **Carrying   amount**  | ** ** | **Accumulated   amortization** | ** ** |
| ** **                      | ** ** | ** **             | ** ** | ** ** | ** ** |
| Favorable  lease                |       | $                      | 13,150     |   | $ | (694 | ) |
| Internet  sites                 |       | 2,066                  |       | (218 | ) |
| Total                           |       | $                      | 15,216     |   | $ | (912 | ) |

 

| **Unamortized intangible assets** |   |   |   |   |   |
|-----------------------------------|--------|--------|--------|--------|--------|
| Tradename                         |   | $      | 7,375  |   |   |   |
|                                   |        |        |        |        |        |  |

 

Favorablelease intangible assets are amortized over the term of the lease, which is upto 50 years, and internet sites are amortized over ten years.

 

Amortization expense for the three monthsended June 30, 2008 was $84,000 (2007 — $146,000).  Amortization expense for the six months endedJune 30, 2008 was $170,000 (2007 — $238,000).  Estimated amortization expense for each ofthe years ended December 31, 2008 to December 31, 2012 is $340,000.

 

**8.             Long-term debt and obligations under capital lease**

 

Long-term debt consists of the following(dollars in thousands):

 

| ** **                                                                                                                                                                                                  | ** ** | **June 30,  2008** | ** ** | **December 31,  2007** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| ** **                                                                                                                                                                                                  | ** ** | ** **              | ** ** | ** **                  | ** ** |
| Loans  from banks collateralized by property, plant and equipment payable over  periods of 1 to 11 years, with a weighted average interest rate of 5.53% and  5.77%, respectively, primarily based on LIBOR |       | $                       | 819,536    |                        | $          | 767,916 |   |
| Loan  secured by river cruiseship, payable over 3 years, with a weighted interest  rate of 7.48% at December 31, 2007 based on LIBOR                                                                        |       | —                  |       | 2,500                       |       |
| Obligations  under capital lease                                                                                                                                                                            |       | 15,649                  |       | 15,994                      |       |
|                                                                                                                                                                                                        |       | 835,185                 |       | 786,410                     |       |
| Less:  current portion                                                                                                                                                                                      |       | (115,779                | )          | (127,795                    | )          |
|                                                                                                                                                                                                        |       | $                       | 719,406    |                        | $          | 658,615 |   |

 

The carryingvalue of the debt is equal to its fair value.

 

 

 

 

16

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Of the currentportion of long-term debt, $81,148,000 (December 31, 2007 - $45,140,000)related to revolving facilities which, although falling due within 12 months,are available for reborrowing throughout the period of the loan facilitieswhich are repayable in 2011.

 

Certain creditagreements of OEH have restrictive covenants. At June 30, 2008, OEH was in compliance with these covenants,including a minimum consolidated net worth test and a minimum consolidatedinterest coverage test as defined under a bank-syndicated €190,000,000 loanfacility.  OEH does not currently haveany covenants in its loan agreements which limit the payment of dividends.

 

The following is a summary of the aggregate maturitiesof long-term debt, including obligations under capital lease, at June 30,2008 (dollars in thousands):

 

 

 

| **Year ending December 31,** | ** ** | ** ** | ** ** |
|-----------------------------------|------------|------------|------------|
| ** **                        | ** ** | ** ** | ** ** |
| 2009                              |       | $          | 17,494     |   |
| 2010                              |       | 55,828     |       |
| 2011                              |       | 421,943    |       |
| 2012                              |       | 96,079     |       |
| 2013  and thereafter              |       | 128,062    |       |
|                              |       | $          | 719,406    |   |

 

**9.             Otherliabilities**

 

Other liabilities are $1,379,000 of deferredconsideration in respect of the acquisition of land next to Maroma Resort andSpa after discounting to present value, and $2,314,000 of deferred income relatingto guarantees given by OEH in connection with bank loans entered into by thePeruvian hotel joint venture operation. (See Note 18).

 

**10.          Incometaxes**

 

The Company is incorporated in Bermuda, which does not impose an incometax. OEH’s effective tax rate is entirely due to the income taxes imposed byjurisdictions in which OEH conducts business other than Bermuda.

 

OEH recorded a tax provision for the three months ended June 30,2008 of $9,722,000 compared to a provision of $8,759,000 for the correspondingperiod in 2007. OEH’s current tax cost for the three months ended June 30,2008 was $2,806,000 compared to a cost of $3,171,000 in 2007.

 

 

 

 

17

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Cumulatively, OEH recorded a tax provision for the six months ended June 30,2008 of $6,165,000 compared to a provision of $6,031,000 for the corresponding six monthsin 2007. OEH’s current tax cost for the six months ended June 30, 2008 was$5,875,000 compared to a cost of $5,650,000 in 2007.

 

OEH’s tax charge for the three months ended June 30, 2008 includeda tax charge of $522,000 in respect of the provision under FASB interpretation No. 48,“Accounting for Uncertainty of Income Taxes” (FIN 48), of which $445,000related to interest and penalty costs associated with uncertain taxpositions.  OEH’s tax charge of$6,165,000 for the six months ended June 30, 2008 included a tax charge of$808,000 in respect of the FIN 48 provision, including a charge of $698,000that related to potential interest and penalty costs.

 

As at June 30, 2008, OEH had recognized a provision of $26,189,000(December 31, 2007 - $24,025,000) in respect of its uncertain taxpositions.  OEH believes that it isreasonably possible that within the next 12 months the FIN 48 provision willdecrease by approximately $10,000,000 to $18,000,000 as a result of theresolution of tax positions in certain jurisdictions in which OEH operates.

 

Earnings from unconsolidated subsidiaries are reported net of tax inthe statements of condensed consolidated operations. The applicable taxprovision in the three months ended June 30, 2008 was $1,439,000 comparedto a provision of $1,377,000 in the corresponding period in 2007. Thecumulative tax provision applicable to unconsolidated subsidiaries in the sixmonths ended June 30, 2008 was $2,620,000 compared to a provision of$2,563,000 in the corresponding period in 2007.

 

**11.          Pensions**

 

Components ofnet periodic pension benefit cost were as follows (dollars in thousands)

 

| **Three months ended June 30,** | ** ** | **2008**   | ** ** | **2007**   | ** ** |
|--------------------------------------|------------|------------|------------|------------|------------|
| ** **                           | ** ** | ** ** | ** ** | ** ** | ** ** |
| Service  cost                        |       | $          | —     |       | $          | — |   |
| Interest  cost                       |       | 310        |       | 290        |       |
| Expected  return on plan assets      |       | (295       | )          | (268       | )          |
| Amortization  of net loss            |       | 120        |       | 140        |       |
| Net  periodic benefit cost           |       | $          | 135        |       | $          | 162 |   |

 

 

 

 

 

18

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| **Six months ended June 30,** | ** ** | **2008**   | ** ** | **2007**   | ** ** |
|------------------------------------|------------|------------|------------|------------|------------|
| ** **                         | ** ** | ** ** | ** ** | ** ** | ** ** |
| Service  cost                      |       | $          | —     |       | $          | — |   |
| Interest  cost                     |       | 621        |       | 574        |       |
| Expected  return on plan assets    |       | (590       | )          | (530       | )          |
| Amortization  of net loss          |       | 239        |       | 277        |       |
| Net  periodic benefit cost         |       | $          | 270        |       | $          | 321 |   |

 

As reported inNote 10 to the financial statements in the Company’s 2007 Form 10-K annualreport, OEH expected to contribute $1,385,000 to its defined benefit pensionplan in 2008.  As of June 30, 2008,$689,000 of contributions had been made. OEH anticipates contributing an additional $696,000 to fund its pensionplans in 2008 for a total of $1,385,000.

 

**12.****                              ****Supplemental cash flow information**

                                                (Dollars in thousands)

 

| **Six months ended June 30,** | ** ** | **2008** | ** ** | **2007** | ** ** |
|------------------------------------|------------|----------|------------|----------|------------|
|                               |       |     |       |     |       |
| Cash  paid for:                    |       |     |       |     |       |
| Interest                           |       | $        | 27,210     |     | $          | 23,984 |   |
| Income  taxes                      |       | $        | 9,144      |     | $          | 5,650 |   |

 

In conjunction with acquisitions (see Note 3)liabilities were assumed as follows (dollars in thousands): 

 

| **Six months ended June 30,** | ** ** | **2008** | ** ** | **2007** | ** ** |
|------------------------------------|------------|----------|------------|----------|------------|
|                               |       |     |       |     |       |
| Fair  value of assets acquired     |       | $        | 3,316      |     | $          | 9,533 |   |
| Cash  paid                         |       | (3,316   | )          | (5,826   | )          |
| Liabilities  assumed               |       | $        | —     |     | $          | 3,707 |   |

 

*Restricted cash*

 

Restricted cash of $7,494,000 as at June 30, 2008and $3,800,000 as at December 31, 2007 consisted mainly of the PortoCupecoy escrow account.  Cash receivedfor residential condominium purchases at Cupecoy is held in escrow until thenext phase of construction, when the cash is released into OEH’s current bankaccount.  At June 30, 2008, thisescrow account balance amounted to $7,182,000 (December 31, 2007 —$3,800,000).

 

**13.****                              ****Accumulated other comprehensive income**

 

The accumulated balances for each component of other comprehensiveincome are as follows (dollars in thousands):

 

 

 

 

19

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| ** **                                        | ** ** | **June 30,  2008** | ** ** | **December 31,  2007** | ** ** |
|---------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| ** **                                        | ** ** | ** **              | ** ** | ** **                  | ** ** |
| Foreign  currency translation adjustments         |       | $                       | 47,037     |                        | $          | 38,191 |   |
| Derivative  financial instruments                 |       | 3,899                   |       | 730                         |       |
| Additional  minimum pension liability, net of tax |       | (8,490                  | )          | (8,490                      | )          |
|                                              |       | $                       | 42,446     |                        | $          | 30,431 |   |

 

The components of comprehensive income areas follows (dollars in thousands):

 

| **Six months ended June 30,**        | ** ** | **2008** | ** ** | **2007** | ** ** |
|-------------------------------------------|------------|----------|------------|----------|------------|
|                                      |       |     |       |     |       |
| Net  earnings on common shares            |       | $        | 15,126     |     | $          | 16,022 |   |
| Foreign  currency translation adjustments |       | 8,846    |       | 17,774   |       |
| Change  in fair value of derivatives      |       | 3,169    |       | 2,469    |       |
| Comprehensive  income                     |       | $        | 27,141     |     | $          | 36,265 |   |

 

**14.          Commitments**

 

Outstanding contracts to purchase fixed assets wereapproximately $128,125,000 at June 30, 2008 (December 31, 2007 —$102,361,000).

 

**15.          Informationconcerning financial reporting for segments and operations in differentgeographical areas**

 

As reported in the Company’s 2007 Form 10-Kannual report, OEH has three reporting segments, (i) hotels andrestaurants, (ii) tourist trains and cruises, and (iii) real estateand property development.  Segmentperformance is evaluated based upon segment net earnings before interest, tax(including tax on earnings from unconsolidated companies), depreciation andamortization (“segment EBITDA”). Financial information regarding these business segments is as follows,with net finance costs appearing net of capitalized interest and interest andrelated income (dollars in thousands):

 

 

 

 

 

20

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| **Three months ended June 30,**                                                                                                                                                    | ** ** | **2008** | ** ** | **2007** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| Revenue:                                                                                                                                                                                |       |     |       |     |       |
| Hotels  and restaurants                                                                                                                                                                 |       |     |       |     |       |
| Owned  hotels — Europe                                                                                                                                                             |       | $        | 85,674     |     | $          | 76,999 |   |
|                            —  North America |       | 23,720   |       | 21,986   |       |
|                            —  Rest of world |       | 30,840   |       | 25,809   |       |
| Hotel  management/part ownership interests                                                                                                                                              |       | 3,324    |       | 2,924    |       |
| Restaurants                                                                                                                                                                             |       | 5,288    |       | 5,643    |       |
|                                                                                                                                                                                    |       | 148,846  |       | 133,361  |       |
| Tourist  trains and cruises                                                                                                                                                             |       | 28,067   |       | 25,249   |       |
| Real  estate                                                                                                                                                                            |       | 4,443    |       | 847      |       |
|                                                                                                                                                                                    |       | $        | 181,356    |     | $          | 159,457 |   |
|                                                                                                                                                                                    |       |     |       |     |       |
| Depreciation  and amortization:                                                                                                                                                         |       |     |       |     |       |
| Hotels  and restaurants                                                                                                                                                                 |       |     |       |     |       |
| Owned  hotels — Europe                                                                                                                                                             |       | $        | 4,902      |     | $          | 3,988 |   |
|                            —  North America |       | 1,948    |       | 1,807    |       |
|                            —  Rest of world |       | 2,316    |       | 2,483    |       |
| Restaurants                                                                                                                                                                             |       | 283      |       | 232      |       |
|                                                                                                                                                                                    |       | 9,449    |       | 8,510    |       |
| Tourist  trains and cruises                                                                                                                                                             |       | 833      |       | 1,247    |       |
|                                                                                                                                                                                    |       | $        | 10,282     |     | $          | 9,757 |   |
|                                                                                                                                                                                    |       |     |       |     |       |
| Segment  EBITDA:                                                                                                                                                                        |       |     |       |     |       |
| Owned  hotels — Europe                                                                                                                                                             |       | 34,190   |       | 31,778   |       |
|                            —  North America |       | 3,325    |       | 3,315    |       |
|                            —  Rest of world |       | 3,633    |       | 5,130    |       |
| Hotel  management/part ownership interests                                                                                                                                              |       | 7,736    |       | 7,029    |       |
| Restaurants                                                                                                                                                                             |       | 920      |       | 1,288    |       |
| Tourist  trains and cruises                                                                                                                                                             |       | 9,826    |       | 8,712    |       |
| Real  estate                                                                                                                                                                            |       | (463     | )          | (24      | )          |
| Central  overheads                                                                                                                                                                      |       | (7,159   | )          | (7,335   | )          |
|                                                                                                                                                                                    |       | $        | 52,008     |     | $          | 49,893 |   |
|                                                                                                                                                                                    |       |     |       |     |       |
| Segment EBITDA/net earnings reconciliation:                                                                                                                                             |       |     |       |     |       |
| Segment  EBITDA                                                                                                                                                                         |       | $        | 52,008     |     | $          | 49,893 |   |
| Less:                                                                                                                                                                                   |       |     |       |     |       |
| Depreciation  and amortization                                                                                                                                                          |       | 10,282   |       | 9,757    |       |
| Interest  expense, net                                                                                                                                                                  |       | 11,461   |       | 10,910   |       |
| Foreign  currency, net                                                                                                                                                                  |       | (2,617   | )          | (1,151   | )          |
| Provision  for income taxes                                                                                                                                                             |       | 9,722    |       | 8,759    |       |
| Share  of provision for income taxes of unconsolidated companies                                                                                                                        |       | 1,439    |       | 1,377    |       |
| Earnings  from continuing operations                                                                                                                                                    |       | $        | 21,721     |     | $          | 20,241 |   |
|                                                                                                                                                                                    |       |     |       |     |       |
| Earnings  from unconsolidated companies, net of tax:                                                                                                                                    |       |     |       |     |       |
| Hotels  and restaurants                                                                                                                                                                 |       |     |       |     |       |
| Hotel  management/part ownership interests                                                                                                                                              |       | $        | 3,326      |     | $          | 3,082 |   |
| Tourist  trains and cruises                                                                                                                                                             |       | 2,512    |       | 1,152    |       |
|                                                                                                                                                                                    |       | $        | 5,838      |     | $          | 4,234 |   |

 

 

 

 

21

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| **Six months ended June 30,**                                                                                                                                                      | ** ** | **2008** | ** ** | **2007** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| Revenue:                                                                                                                                                                                |       |     |       |     |       |
| Hotels  and restaurants                                                                                                                                                                 |       |     |       |     |       |
| Owned  hotels — Europe                                                                                                                                                             |       | $        | 112,813    |     | $          | 98,114 |   |
|                            —  North America |       | 50,390   |       | 45,124   |       |
|                            —  Rest of world |       | 71,607   |       | 58,697   |       |
| Hotel  management/part ownership interests                                                                                                                                              |       | 5,825    |       | 5,298    |       |
| Restaurants                                                                                                                                                                             |       | 10,154   |       | 10,938   |       |
|                                                                                                                                                                                    |       | 250,789  |       | 218,171  |       |
| Tourist  trains and cruises                                                                                                                                                             |       | 36,721   |       | 34,608   |       |
| Real  estate                                                                                                                                                                            |       | 8,526    |       | 847      |       |
|                                                                                                                                                                                    |       | $        | 296,036    |     | $          | 253,626 |   |
|                                                                                                                                                                                    |       |     |       |     |       |
| Depreciation  and amortization:                                                                                                                                                         |       |     |       |     |       |
| Hotels  and restaurants                                                                                                                                                                 |       |     |       |     |       |
| Owned  hotels — Europe                                                                                                                                                             |       | $        | 9,588      |     | $          | 7,707 |   |
|                            —  North America |       | 3,842    |       | 3,550    |       |
|                            —  Rest of world |       | 4,666    |       | 4,752    |       |
| Restaurants                                                                                                                                                                             |       | 562      |       | 461      |       |
|                                                                                                                                                                                    |       | 18,658   |       | 16,470   |       |
| Tourist  trains and cruises                                                                                                                                                             |       | 1,908    |       | 2,062    |       |
|                                                                                                                                                                                    |       | $        | 20,566     |     | $          | 18,532 |   |
|                                                                                                                                                                                    |       |     |       |     |       |
| Segment  EBITDA:                                                                                                                                                                        |       |     |       |     |       |
| Owned  hotels — Europe                                                                                                                                                             |       | $        | 30,446     |     | $          | 28,223 |   |
|                            —  North America |       | 10,625   |       | 9,435    |       |
|                            —  Rest of world |       | 16,380   |       | 17,214   |       |
| Hotel  management/part ownership interests                                                                                                                                              |       | 12,954   |       | 11,676   |       |
| Restaurants                                                                                                                                                                             |       | 1,569    |       | 2,156    |       |
| Tourist  trains and cruises                                                                                                                                                             |       | 11,369   |       | 9,860    |       |
| Real  estate                                                                                                                                                                            |       | (960     | )          | (482     | )          |
| Central  overheads                                                                                                                                                                      |       | (13,958  | )          | (13,016  | )          |
|                                                                                                                                                                                    |       | $        | 68,425     |     | $          | 65,066 |   |
|                                                                                                                                                                                    |       |     |       |     |       |
| Segment EBITDA/net earnings reconciliation:                                                                                                                                             |       |     |       |     |       |
| Segment  EBITDA                                                                                                                                                                         |       | $        | 68,425     |     | $          | 65,066 |   |
| Less:                                                                                                                                                                                   |       |     |       |     |       |
| Depreciation  and amortization                                                                                                                                                          |       | 20,566   |       | 18,532   |       |
| Interest  expense, net                                                                                                                                                                  |       | 24,390   |       | 21,448   |       |
| Foreign  currency, net                                                                                                                                                                  |       | (4,662   | )          | (1,253   | )          |
| Provision  for income taxes                                                                                                                                                             |       | 6,165    |       | 6,031    |       |
| Share  of provision for income taxes of unconsolidated companies                                                                                                                        |       | 2,620    |       | 2,563    |       |
| Earnings  from continuing operations                                                                                                                                                    |       | $        | 19,346     |     | $          | 17,745 |   |
|                                                                                                                                                                                    |       |     |       |     |       |
| Earnings  from unconsolidated companies, net of tax:                                                                                                                                    |       |     |       |     |       |
| Hotels  and restaurants                                                                                                                                                                 |       |     |       |     |       |
| Hotel  management/part ownership interests                                                                                                                                              |       | $        | 6,060      |     | $          | 4,582 |   |
| Tourist  trains and cruises                                                                                                                                                             |       | 3,845    |       | 1,955    |       |
|                                                                                                                                                                                    |       | $        | 9,905      |     | $          | 6,537 |   |

 

 

 

 

 

22

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| **Six months ended June 30,**                                                                                                                                                      | ** ** | **2008** | ** ** | **2007** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
|                                                                                                                                                                                    |       |     |       |     |       |
| Capital  expenditure:                                                                                                                                                                   |       |     |       |     |       |
| Owned  hotels — Europe                                                                                                                                                             |       | $        | 23,615     |     | $          | 18,649 |   |
|                            —  North America |       | 10,951   |       | 16,211   |       |
|                            —  Rest of world |       | 8,293    |       | 5,990    |       |
| Restaurants                                                                                                                                                                             |       | 284      |       | 457      |       |
| Tourist  trains and cruises                                                                                                                                                             |       | 2,976    |       | 1,772    |       |
| Real  estate                                                                                                                                                                            |       | 4,081    |       | 2,596    |       |
|                                                                                                                                                                                    |       | $        | 50,200     |     | $          | 45,675 |   |

 

Financial information regarding geographic areas basedon the location of properties is as follows (dollars in thousands):

 

| **Three months ended June 30,** | ** ** | **2008**   | ** ** | **2007**   | ** ** |
|--------------------------------------|------------|------------|------------|------------|------------|
| ** **                           | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenue:                             |       |       |       |       |       |
| Europe                               |       | $          | 112,834    |       | $          | 101,638 |   |
| North  America                       |       | 35,083     |       | 29,691     |       |
| Rest  of world                       |       | 33,439     |       | 28,128     |       |
|                                 |       | $          | 181,356    |       | $          | 159,457 |   |

 

| **Six months ended June 30,** | ** ** | **2008**   | ** ** | **2007**   | ** ** |
|------------------------------------|------------|------------|------------|------------|------------|
| ** **                         | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenue:                           |       |       |       |       |       |
| Europe                             |       | $          | 146,068    |       | $          | 129,476 |   |
| North  America                     |       | 71,774     |       | 59,079     |       |
| Rest  of world                     |       | 78,194     |       | 65,071     |       |
|                               |       | $          | 296,036    |       | $          | 253,626 |   |

 

 

**16.          Stock-basedawards with performance/market criteria**

 

On March 3,2008, the Company granted to nine employees share-based awards with performanceand market conditions covering a total of 29,765 class A common shares underits 2007 performance share plan.  Theshares will be issued after three years from the grant date upon payment of anominal amount, provided performance and market criteria set forth in theawards are met.  All of these awards wereoutstanding at June 30, 2008.

 

Half of eachaward is subject to performance criteria based on OEH’s earnings before tax forthe year ending December 31, 2010, and the other half of each award issubject to market criteria based on OEH’s total shareholder return compared tothe average total shareholder return of a specified group of other hotel andleisure companies over the period of three years.

 

 

 

 

23

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When theshares are issued under the awards, the grantees are also entitled to receive acash equivalent of the dividends, if any, that would have been paid on theclass A common shares during the period between the grant date and the shareissue date.

 

The fair valueof the awards with performance and market conditions granted in the six monthsended June 30, 2008 was $568,000 (2007 - $nil).  The weighted-average grant date fair value ofthe performance-based part of the awards was $51.95 per share and of themarket-based part of the awards $31.60 per share.  The assumptions used in the Monte Carlovaluation model were:

 

| Expected  share price volatility     |   | 33.1%   |   |
|--------------------------------------|--------|---------|--------|
| Risk-free  interest rate             |   | 1.76%   |   |
| Expected  annual dividends per share |   | $0.10   |   |
| Expected  life of awards             |   | 3 years |   |

 

Expectedvolatility is based on historical volatility of the Company’s class A commonshare price and other factors.  The termof awards represents the period of time they are expected to be outstanding,based on historical data.  The risk-freerate for periods within the contractual life of the awards is based on the USTreasury yield curve in effect at the time of grant.

 

**17.          Derivativefinancial instruments**

 

*Interest rate swaps*

 

OEH is exposedto interest rate risk on its floating rate debt, and in the last few years hasentered into interest rate swap agreements that limit the exposure to a fixedrate level.

 

In September 2006,OEH entered into five-year interest rate swap agreements for the notionalamounts of €75,000,000 ($118,000,000) and €24,700,000 ($38,900,000) that limitthe exposure from interest rate fluctuations of Euro debt to a fixed ratelevel.

 

Although theinterest rate swap for €24,700,000 economically hedges the interest rate risk,it has not qualified as a cash flow hedge from inception and, therefore,changes in the fair value of this swap have been recorded within interestexpense of $629,000 gain for the three months ended June 30, 2008 (2007 —$710,000), and $219,000 gain for the six months ended June 30, 2008 (2007 —$1,003,000).

 

 

 

 

 

24

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The interestrate swap for €75,000,000 has been designated and has qualified as a cash flowhedge of the floating rate debt effective December 31, 2006.  This swap is expected to be, and has beenhighly effective in off-setting exposures from fluctuations in interestrates.  The movements recorded in othercomprehensive income were $3,770,000 gain for the three months ended June 30,2008 (2007 — $1,960,000), and $2,055,000 gain for the six months ended June 30,2008 (2007 — $2,446,000).  Theineffective portion recorded in earnings was $4,000 gain for the three monthsended June 30, 2008 (2007 — $nil), and $121,000 loss for the six monthsended June 30, 2008 (2007 — $49,000 gain).

 

In October 2007,OEH entered into five-year interest rate swap agreements for the notionalamounts of $10,000,000 and $20,000,000 that limit the exposure from interestrate fluctuations of US dollar debt to a fixed rate level.

 

The swaps havebeen designated and qualified as cash flow hedges of the floating rate debteffective since October 18, 2007. These swaps are expected to be, and have been, highly effective.  The movements recorded in other comprehensiveincome were $1,200,000 gain for the three months ended June 30, 2008 (2007— $nil), and $80,000 gain for the six months ended June 30, 2008 (2007 —$nil).

 

In April 2008,OEH entered into six different three- to five-year interest rate swapagreements for the total notional amount of $151,000,000, amortizing to$96,800,000, that limit the exposure from interest rate fluctuations of USdollar debt to a fixed rate level.

 

The swaps havebeen designated and have qualified as cash flow hedges of the floating ratedebt effective since April 29, 2008. These swaps are expected to be, and have been, highly effective.  The movements recorded in other comprehensiveincome were $1,085,000 gain for the three months ended June 30, 2008 andfor the six months ended June 30, 2008 (2007 — $nil).

 

Of theexisting gains at June 30, 2008, approximately $1,150,000 will bereclassified into earnings in the next 12 months, assuming no further changesin fair value of the contracts.

 

At June 30,2008 and December 31, 2007, the fair values of the outstanding interestrate swaps were as follows (dollars in thousands):

 

 

 

 

25

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| **Derivative Name**    | ** ** | **June 30, 2008** | ** ** | **December 31, 2007** | ** ** |
|------------------------|------------|------------------------|------------|----------------------------|------------|
| ** **             | ** ** | **Asset**              | ** ** | **Liability**              | ** ** | **Asset** | ** ** | **Liability** | ** ** |
| Euro  swap €75m   |       | $                      | 4,384      |                       | $          | — |   | $ | 2,287 |   | $ | — |   |
| Euro  swap €24.7m |       | 801                    |       | —                     |       | 546 |   | — |   |
| USD  swap $10m         |       | —                 |       | 336                        |       | — |   | 337 |   |
| USD  swap $20m         |       | —                 |       | 605                        |       | — |   | 685 |   |
| USD  swap $151m        |       | 1,085                  |       | —                     |       | — |   | — |   |
|                   |       | $                      | 6,270      |                       | $          | 941 |   | $ | 2,833 |   | $ | 1,022 |   |

 

The fairvalues of the swaps were accounted for as other non-current assets and accruedliabilities.

 

*Net investment hedges*

 

OEH designatedits Euro-denominated revolving indebtedness as a net investment hedge oflong-term investments in its Euro-functional subsidiaries.  The amount of gains and losses related to theeffective portion of the net investment hedge, net of tax, recorded in other comprehensiveincome was $36,000 gain for the three months ended June 30, 2008 (2007 —$nil) and $5,479,000 loss for the six months ended June 30, 2008 (2007 —$nil). There has been no ineffective portion of the hedge.

 

**18.          Relatedparty transactions**

 

OEH guarantees a $3,000,000 bank loan to Eastern andOriental Express Ltd. in which OEH has a minority shareholder interest.  The amount due to OEH by Eastern and OrientalExpress Ltd. at June 30, 2008 was $2,223,000 (December 31, 2007 —$1,330,000).

 

OEH managesunder a long-term contract the Charleston Place Hotel (accounted for under theequity method) and has made loans to the hotel-owning company.  For the three months ended June 30,2008, OEH earned $1,684,000 (2007 — $1,541,000) in management fees which arerecorded in revenue, and $3,000,000 (2007 — $2,935,000) in interest income onpartnership and other loans, which are recorded in earnings from unconsolidatedcompanies.  For the six months ended June 30,2008, OEH earned $2,888,000 (2007 — $2,892,000) in management fees which arerecorded in revenue, and $6,004,000 (2007 — $5,729,000) in interest income onpartnership and other loans, which are recorded in earnings from unconsolidatedcompanies.  These loans have anindefinite maturity period.  The amountdue to OEH from Charleston Place Hotel at June 30, 2008 was $12,776,000 (December 31,2007 — $19,749,000).

 

OEH manages under long-term contracts the Hotel Monasterio, the MachuPicchu Sanctuary Lodge and Las Casitas del Colca owned by its 50/50 jointventure with local Peruvian interests, as well as the 50/50-owned PeruRailoperation, and provides loans,

 

 

 

 

 

26

----

 

 

guarantees andother credit accommodation to these joint ventures.  In the three months ended June 30, 2008,OEH earned management and guarantee fees of $2,002,000 (2007 — $1,619,000) andloan interest of $15,000 (2007 — $15,000) which are recorded in revenue.   In the six months ended June 30, 2008,OEH earned management and guarantee fees of $3,714,000 (2007 — $2,948,000) andloan interest of $31,000 (2007 — $31,000) which are recorded in revenue.   At June 30, 2008, OEH had a $750,000subordinated loan to the PeruRail operation with an indefinite maturity dateand interest at a spread over LIBOR.  OEHhas guaranteed bank loans of $16,522,000 which have been drawn down by thehotel joint venture.  OEH expects to earn$2,644,000 in guarantee fees over the period of the loan and this amount wasincluded in the amounts due to OEH at June 30, 2008.  The amount due to OEH from its Peruvian jointventure operations at June 30, 2008 was $8,956,000 (December 31, 2007— $6,277,000).

 

OEH manages under a long-term contract the Hotel Ritz in Madrid, Spain,in which OEH owns a 50% interest and is accounted for under the equitymethod.  For the three months ended June 30,2008, OEH earned $502,000 (2007 — $452,000) in managementfees, which are included in revenue.  Forthe six months ended June 30, 2008, OEH earned $848,000 (2007 — $685,000) inmanagement fees, which are included in revenue. The amount due to OEH from the Hotel Ritz, Madrid, at June 30, 2008was $2,223,000 (December 31, 2007 — $2,624,000).

 

James Sherwood, a director of the Company, has a right of first refusalto purchase the Hotel Cipriani in Venice, Italy in the event OEH proposes tosell it.  The purchase price would be theoffered sale price in the case of a cash sale or the fair market value of thehotel, as determined by an independent valuer, in the case of a non-cashsale.  Mr. Sherwood has also beengranted an option to purchase the hotel at fair market value if a change incontrol of the Company occurs.

 

 

 

 

 

27

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**ITEM 2.          Management’s Discussion and Analysis of Financial Conditionand Results of Operations**

 

**Resultsof Operations**

 

**Threemonths Ended June 30, 2008 compared to Three months Ended June 30,2007**

 

OEH’s operating results for the three months ended June 30,2008 and 2007, expressed as a percentage of revenue, were as follows:

 

 

| **Three months ended June 30,**                 | ** ** | **2008** | ** ** | **2007** | ** ** |
|------------------------------------------------------|------------|----------|------------|----------|------------|
| ** **                                           | ** ** | **%**    | ** ** | **%**    | ** ** |
| Revenue                                              |       |     |       |     |       |
| Hotels  and restaurants                              |       | 82       |       | 84       |       |
| Tourist  trains and cruises                          |       | 16       |       | 16       |       |
| Real  estate                                         |       | 2        |       | 0        |       |
|                                                 |       | 100      |       | 100      |       |
|                                                 |       |     |       |     |       |
| Expenses                                             |       |     |       |     |       |
| Depreciation  and amortization                       |       | 6        |       | 6        |       |
| Operating                                            |       | 47       |       | 45       |       |
| Selling,  general and administrative                 |       | 28       |       | 28       |       |
| Net  finance costs                                   |       | 5        |       | 6        |       |
| Earnings  before income taxes                        |       | 14       |       | 15       |       |
| Provision  for income taxes                          |       | (5       | )          | (6       | )          |
| Earnings  from unconsolidated companies              |       | 3        |       | 3        |       |
| Net  earnings from continuing operations             |       | 12       |       | 12       |       |
| Net  Losses from discontinued operations, net of tax |       | (1       | )          | —   |       |
| Net  earnings as a percentage of revenue             |       | 11       |       | 12       |       |

 

Segment net earnings before interest, tax(including tax on unconsolidated companies), depreciation and amortization (“segmentEBITDA”) of OEH’s operations for the three months ended June 30, 2008 and2007 are analyzed as follows (dollars in millions):

 

 

 

 

 

28

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| **Three months ended June 30,** | ** ** | **2008** | ** ** | **2007** | ** ** |
|--------------------------------------|------------|----------|------------|----------|------------|
|                                 |       |     |       |     |       |
| Segment  EBITDA:                     |       |     |       |     |       |
| Owned  hotels:                       |       |     |       |     |       |
| Europe                               |       | $        | 34.2       |     | $          | 31.8 |   |
| North  America                       |       | 3.3      |       | 3.3      |       |
| Rest  of the World                   |       | 3.6      |       | 5.1      |       |
| Hotel  management interests          |       | 7.8      |       | 7.0      |       |
| Restaurants                          |       | 0.9      |       | 1.3      |       |
| Tourist  trains and cruises          |       | 9.8      |       | 8.7      |       |
| Real  estate                         |       | (0.4     | )          | 0.0      |       |
| Central  overheads                   |       | (7.2     | )          | (7.3     | )          |
| Total  segment EBITDA                |       | $        | 52.0       |     | $          | 49.9 |   |

 

The foregoingsegment EBITDA reconciles to net earnings as follows (dollars in millions):

 

| **Three months ended June 30,**                             | ** ** | **2008**   | ** ** | **2007**   | ** ** |
|------------------------------------------------------------------|------------|------------|------------|------------|------------|
| ** **                                                       | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net earnings                                                     |       | $          | 19.5       |       | $          | 19.7 |   |
| Add:                                                             |       |       |       |       |       |
| Depreciation  and amortization                                   |       | 10.3       |       | 9.8        |       |
| Net  finance costs                                               |       | 8.8        |       | 9.8        |       |
| Provision  for income taxes                                      |       | 9.7        |       | 8.8        |       |
| Loss  from discontinued operations, net of tax                   |       | 2.3        |       | 0.4        |       |
| Share  of provision for income taxes of unconsolidated companies |       | 1.4        |       | 1.4        |       |
| Segment  EBITDA                                                  |       | $          | 52.0       |       | $          | 49.9 |   |

 

Managementevaluates the operating performance of OEH’s segments on the basis of segmentEBITDA and believes that segment EBITDA is a useful measure of operatingperformance because segment EBITDA is not affected by non-operating factorssuch as leverage and the historic cost of assets.  EBITDA is a financial measure commonly usedin OEH’s industry.  OEH’s segment EBITDA,however, may not be comparable in all instances to EBITDA as disclosed by othercompanies.  Segment EBITDA should not beconsidered as an alternative to earnings from operations or net earnings (asdetermined in accordance with US generally accepted accounting principles) as ameasure of OEH’s operating performance, or as an alternative to net cashprovided by operating, investing and financing activities (as determined inaccordance with US generally accepted accounting principles) as a measure ofOEH’s ability to meet cash needs.

 

 

 

 

 

29

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Operating information for OEH’s owned hotels for thethree months ended June 30, 2008 and 2007 is as follows:

 

| ** **                       | ** ** | **Three months ended June 30,** | ** ** | ** ** | ** ** | ** **   | ** ** |
|----------------------------------|------------|--------------------------------------|------------|------------|------------|--------------|------------|
| ** **                       | ** ** | **2008**                             | ** ** | **2007**   | ** ** | ** **   | ** ** | ** ** | ** ** |
|                             |       |                                 |       |       |       |         |       |   |   |
| Average  Daily Rate (in dollars) |       |                                 |       |       |       |         |       |   |   |
| Europe                           |       | 924                                  |       | 737        |       |         |       |   |   |
| North  America                   |       | 365                                  |       | 356        |       |         |       |   |   |
| Rest  of the world               |       | 264                                  |       | 234        |       |         |       |   |   |
| Worldwide                        |       | 525                                  |       | 461        |       |         |       |   |   |
|                             |       |                                 |       |       |       |         |       |   |   |
| Rooms  Available (in thousands)  |       |                                 |       |       |       |         |       |   |   |
| Europe                           |       | 91                                   |       | 91         |       |         |       |   |   |
| North  America                   |       | 57                                   |       | 56         |       |         |       |   |   |
| Rest  of the world               |       | 110                                  |       | 94         |       |         |       |   |   |
| Worldwide                        |       | 258                                  |       | 241        |       |         |       |   |   |
|                             |       |                                 |       |       |       |         |       |   |   |
| Rooms  Sold (in thousands)       |       |                                 |       |       |       |         |       |   |   |
| Europe                           |       | 56                                   |       | 61         |       |         |       |   |   |
| North  America                   |       | 39                                   |       | 37         |       |         |       |   |   |
| Rest  of the world               |       | 61                                   |       | 57         |       |         |       |   |   |
| Worldwide                        |       | 156                                  |       | 155        |       |         |       |   |   |
| ** **                       | ** ** | ** **                           | ** ** | ** ** | ** ** | ** **   | ** ** | ** ** | ** ** |
| Occupancy  (percentage)          |       |                                 |       |       |       |         |       |   |   |
| Europe                           |       | 62                                   |       | 67         |       |         |       |   |   |
| North  America                   |       | 68                                   |       | 66         |       |         |       |   |   |
| Rest  of the world               |       | 55                                   |       | 61         |       |         |       |   |   |
| Worldwide                        |       | 60                                   |       | 64         |       |         |       |   |   |
| ** **                       | ** ** | ** **                           | ** ** | ** ** | ** ** | ** **   | ** ** | ** ** | ** ** |
| RevPAR  (in dollars)             |       |                                 |       |       |       |         |       |   |   |
| Europe                           |       | 566                                  |       | 495        |       |         |       |   |   |
| North  America                   |       | 251                                  |       | 235        |       |         |       |   |   |
| Rest  of the world               |       | 148                                  |       | 142        |       |         |       |   |   |
| Worldwide                        |       | 318                                  |       | 297        |       |         |       |   |   |
|                             |       |                                 |       |       |       | **Change %** |       |
| Same  Store RevPAR (in dollars)  |       |                                 |       |       |       | **Dollars**  | ** ** | **Local   Currency** |   |
| Europe                           |       | 483                                  |       | 406        |       | 19           | %          | 10 | % |
| North  America                   |       | 255                                  |       | 238        |       | 7            | %          | 7 | % |
| Rest  of the world               |       | 168                                  |       | 144        |       | 16           | %          | 14 | % |
| Worldwide                        |       | 306                                  |       | 264        |       | 16           | %          | 10 | % |

 

Average daily rate is the average amount achieved forthe rooms sold.  RevPAR is revenue peravailable room, that is the rooms revenue divided by the number of availablerooms for each night of operation. Occupancy is the number of rooms sold divided by the number of availablerooms.  Same store RevPAR is a comparisonbased on the operations of the same units in each period, such as by excludingthe effect of any acquisitions or major refurbishments.  The same store data excludes the followingoperations:

 

 

 

 

 

30

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| Hotel  Cipriani       |   | Hotel  Caruso Belvedere |
|-----------------------|--------|-------------------------|
| El Encanto            |   | Mount Nelson Hotel      |
| Casa de Sierra Nevada |   | Hotel das Cataratas     |

 

*Overview*

 

The net earnings for the period were $19.5 million($0.46 per common share) on revenue of $181.4 million, compared with netearnings of $19.7 million ($0.46 per common share) on revenue of $159.5 millionin the same period in prior year.

 

*Revenue*

** **

| **Three months ended June 30,**       | ** ** | **2008**                   | ** ** | **2007** | ** ** |
|--------------------------------------------|------------|----------------------------|------------|----------|------------|
| ** **                                 | ** ** | **(dollars in thousands)** | ** ** |
| Revenue:                                   |       |                       |       |     |       |
| Hotels  and restaurants                    |       |                       |       |     |       |
| Owned  hotels                              |       |                       |       |     |       |
| Europe                                     |       | $                          | 85,674     |     | $          | 76,999 |   |
| North  America                             |       | 23,720                     |       | 21,986   |       |
| Rest  of the world                         |       | 30,840                     |       | 25,809   |       |
| Hotel  management/part ownership interests |       | 3,324                      |       | 2,924    |       |
| Restaurants                                |       | 5,288                      |       | 5,643    |       |
|                                       |       | 148,846                    |       | 133,361  |       |
| Tourist  trains and cruises                |       | 28,067                     |       | 25,249   |       |
| Real  estate                               |       | 4,443                      |       | 847      |       |
|                                       |       | $                          | 181,356    |     | $          | 159,457 |   |

 

Total revenuesincreased by $21.9 million, or 14%, from $159.5 million in the three monthsended June 30, 2007 to $181.4 million in the three months ended June 30,2008.  Hotels and restaurants revenueincreased by $15.4 million, or 11%, from $133.4 million in the three monthsended June 30, 2007 to $148.8 million in the three months ended June 30,2008. Tourist trains and cruises revenues increased by $2.9 million, or 11%,from $25.2 million for the three months ended June 30, 2007 to $28.1million for the three months ended June 30, 2008.  Real estate revenues increased by $3.5million from $0.9 million for the three months ended June 30, 2007 to $4.4million for the three months ended June 30, 2008.

 

The increasein hotel revenue year on year was due primarily to increased room rates acrossthe group and increased occupancy in North America, Asia and Peru.  Additionally, hotel revenue was positivelyimpacted by exchange rate fluctuations in Europe and the Rest of the Worldregions.

 

 

 

 

 

31

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The revenuefrom restaurants decreased by $0.3 million, or 6%, from $5.6 million in thethree months ended June 30, 2007 to $5.3 million in the three months endedJune 30, 2008.

 

*Owned Hotels:*  For owned hotels overall, same store RevPARin US dollars increased by 16% in the three months ended June 30, 2008compared to the three months ended June 30, 2007.  Measured in local currency this increase insame store RevPAR was 10%.

 

The change in revenue at owned hotels is analyzed on aregional basis as follows:

 

*Europe*

 

| **Three months ended June 30,** | ** ** | **2008**   | ** ** | **2007**   | ** ** |
|--------------------------------------|------------|------------|------------|------------|------------|
| ** **                           | ** ** | ** ** | ** ** | ** ** | ** ** |
| Average  daily rate (in dollars)     |       | 924        |       | 737        |       |
| Rooms  available (in thousands)      |       | 91         |       | 91         |       |
| Rooms  sold (in thousands)           |       | 56         |       | 61         |       |
| Occupancy  (percentage)              |       | 62         |       | 67         |       |
| RevPAR  (in dollars)                 |       | 556        |       | 495        |       |
| Same  store RevPAR (in dollars)      |       | 483        |       | 406        |       |

 

Revenueincreased by $8.7 million, or 11%, from $77.0 million for the three monthsended June 30, 2007 to $85.7 million for the three months ended June 30,2008.  The Grand Hotel Europe revenuesgrew by $5.6 million, or 35%, from $15.9 million for the three months ended June 30,2007 to $21.5 million for the three months ended June 30, 2008.  Of the increased revenue, $3.7 million wasdue to average rate improvements without any reduction in occupancy comparedwith the prior year.  Exchange ratemovements were responsible for the other $1.9 million of revenue growth in theperiod.

 

In Italy,revenues at the Hotel Splendido increased by $0.6 million, or 5%, to $11.1 millionin the three months ended June 30, 2008, but this was offset by a drop inrevenues of $0.6 million at the Villa San Michele.  Revenues at this hotel were $5.1 million inthe three months ended June 30, 2008. Revenue at Hotel Cipriani increased by $0.1 million, to $15.5million.  Revenue at the Hotel Carusofell by $0.2 million to $5.3 million. Without the positive effect of exchange rate movements in the threemonths ended June 30, 2008 compared to the three months ended June 30,2007 of $5.1 million, revenues at the four Italian hotels collectively wouldhave been $5.3 million lower in the current period than in the prior year,reflecting a decline in occupancy of 14% across the four properties.

 

 

 

 

 

32

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Revenue at LaResidencia increased by $1.4 million, or 31%, from $4.6 million for the threemonths ended June 30, 2007 to $6.0 million for the three months ended June 30,2008.  Of the increased revenue, $0.8million was due to exchange rate movements with $0.6 million of the revenuegrowth due to average rate improvements and improved occupancy.  Revenue at Le Manoir aux Quat’Saisons grew by$0.6 million, or 10%, from $6.2 million for the three months ended June 30,2007 to $6.8 million for the three months ended June 30, 2008.  This revenue increase was solely due toaverage rate improvements, including non-room revenue, and occupancyimprovements.

 

Revenue atReids Palace, Madeira increased by $0.6 million, to $7.0 million for the threemonths ended June 30, 2008, from $6.4 million in the prior year.  Revenues at Lapa Palace, Lisbon and Hotel dela Cite, Carcassonne, increased by $0.2 million and $0.3 million, respectively,to $4.4 million and $2.8 million for the three months ended June 30,2008.  These revenue improvements wereall the result of exchange rate movements. Had the Euro to US dollar exchange rate for the three months ended June 30,2008 been the same as in the three months ended June 30, 2007, revenues atthese three properties collectively would have been $0.8 million lower than thecombined revenues of $13.0 million reported in the three months ended June 30,2007.

 

On a samestore basis across the European hotels, RevPAR in local currency increased by10% which translates to a 19% increase in US dollars.

 

*North America*

 

| **Three months ended June 30,** | ** ** | **2008**   | ** ** | **2007**   | ** ** |
|--------------------------------------|------------|------------|------------|------------|------------|
| ** **                           | ** ** | ** ** | ** ** | ** ** | ** ** |
| Average  daily rate (in dollars)     |       | 365        |       | 356        |       |
| Rooms  available (in thousands)      |       | 57         |       | 56         |       |
| Rooms  sold (in thousands)           |       | 39         |       | 37         |       |
| Occupancy  (percentage)              |       | 68         |       | 66         |       |
| RevPAR  (in dollars)                 |       | 251        |       | 235        |       |
| Same  store RevPAR (in dollars)      |       | 255        |       | 238        |       |

 

Revenueincreased by $1.7 million, or 8%, from $22.0 million in the three months ended June 30,2007 to $23.7 million in the three months ended June 30, 2008.  Revenue at Inn at Perry Cabin, Maryland,increased by $0.5 million, or 19%, from $2.9 million for the three months endedJune 30, 2007 to $3.4 million for the three months ended June 30,2008.  Windsor Court Hotel in New Orleansalso recorded a $0.5 million, or 9%, increase in revenue to $6.7 million forthe three months ended June 30, 2008.

 

 

 

 

 

33

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Revenue atMaroma Resort and Spa, Mexico increased by $0.4 million, or 10%, from $4.1million for the three months ended June 30, 2007 to $4.5 million for thethree months ended June 30, 2008, reflecting average rate improvements of3% which offset a slight decline in occupancy compared to the same period in2007.  Revenue at Casa de Sierra Nevada,Mexico increased by $0.3 million, to $0.8 million in the three months ended June 30,2008.  Part of the hotel was closedfor renovation during the three months ended June 30, 2007.

 

Revenue at LaSamanna, St Martin fell by $0.1 million, to $4.8 million in the three monthsended June 30, 2008, while revenue at Keswick Hall, Virginia were $3.4million in both the three months ended June 30, 2007 and the three monthsended June 30, 2008.

 

Across all ofthe North American properties, on a same store basis RevPAR increased by7%.  Average occupancy was 68% in thethree months ended June 30, 2008, compared to 66% in the same period in2007.

 

*Rest of the World*

 

| **Three months ended June 30,** | ** ** | **2008**   | ** ** | **2007**   | ** ** |
|--------------------------------------|------------|------------|------------|------------|------------|
| ** **                           | ** ** | ** ** | ** ** | ** ** | ** ** |
| Average  daily rate (in dollars)     |       | 264        |       | 234        |       |
| Rooms  available (in thousands)      |       | 110        |       | 94         |       |
| Rooms  sold (in thousands)           |       | 61         |       | 57         |       |
| Occupancy  (percentage)              |       | 55         |       | 61         |       |
| RevPAR  (in dollars)                 |       | 148        |       | 142        |       |
| Same  store RevPAR (in dollars)      |       | 168        |       | 144        |       |

 

ExcludingHotel das Cataratas, Brazil, which OEH started to operate on October 1,2007 and which recorded revenue of $1.5 million in the three months ended June 30,2008, revenue in the Rest of the World region increased by $3.5 million, or 14%,from $25.8 million for the three months ended June 30, 2007 to $29.3million for the three months ended June 30, 2008. Revenue at theCopacabana Palace, Brazil increased by $1.6 million, or 21%, to $8.9 millionfor the three months ended June 30, 2008, of which $1.4 million was due tothe effect of exchange rate movements between the Brazilian Real and US dollar.

 

Revenue at OEH’stwo Australian properties increased by $0.8 million, or 15%, from $5.3 millionfor the three months ended June 30, 2007 to $6.1 million for the threemonths ended June 30, 2008.  Theincrease was all due to exchange rate movements between the Australian and USdollars.  Southern Africa 

 

 

 

 

34

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revenuesremained flat at $8.2 million.  A declinein revenue of $0.5 million at the Mount Nelson, Cape Town was offset byincreased revenue at Orient-Express Safaris, Botswana.  Of the Mount Nelson decrease, $0.3 millionwas due to exchange rate movements, while $0.5 million of the revenue increasein Botswana was the result of improved trading compared to the prior year.

 

OEH’s sixAsian hotels collectively increased revenues by $0.8 million, or 27%, from $3.1million in the three months ended June 30, 2007 to $3.9 million in thethree months ended June 30, 2008. This includes a decrease in revenue at The Governors Residence, Yangon,which declined by $0.1 million to $0.1 million following the cyclone thatstruck the country in May 2008, which resulted in the hotel being closedfor part of the quarter.  Excluding TheGovernors Residence, all of the Asian hotels recorded good revenue growth dueto higher average rates without any decline in occupancy.  Exchange rate movements had only a minimaleffect on the Asian hotel revenues.

 

The Rest ofthe World region RevPAR, on a same store basis, increased by 14% in localcurrencies in the three months ended June 30, 2008 compared to the threemonths ended June 30, 2007.  Thistranslates to a same store RevPAR increase of 16% when expressed in US dollars.

 

*Hotel Management andPart-Ownership Interests: *Revenue increased by $0.4million from $2.9 million in the three months ended June 30, 2007 to $3.3million in the three months ended June 30, 2008.  Revenue earned from the managed hotel inCharleston increased by $0.1 million, or 9%, to $1.7 million for the threemonths ended June 30, 2008.  Revenueearned from the managed hotels in Peru increased by $0.2 million, or 22%, to$1.1 million for the three months ended June 30, 2008.

 

*Restaurants*:  Revenue decreased by $0.3 million, from $5.6million in the three months ended June 30, 2007 to $5.3 million in thethree months ended June 30, 2008. Revenue at ‘21’ Club in New York fell by $0.5 million, or 10%, to $4.8million in the three months ended June 30, 2008, due to a reduced volumeof corporate events.  Revenue at LaCabana, Buenos Aires, Argentina, increased by $0.2 million, to $0.5 million forthe three months ended June 30, 2008.

 

*Trains and Cruises: *Revenue increased by $2.9 million, from$25.2 million in the three months ended June 30, 2007 to $28.1 million inthe three months ended June 30, 2008. Excluding revenue for the Road to Mandalay river cruiseship in Burma,which fell by $0.3 million following the cyclone that struck the country in May 2008,revenue increased by $3.2 million.

 

 

 

 

35

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VeniceSimplon-Orient-Express revenue increased by $2.0 million, or 19%, from $10.4million for the three months ended June 30, 2008 to $12.4 million for thethree months ended June 30, 2008. Revenues from the day train services operated in the United Kingdomincreased by $0.4 million, or 7%, to $6.1 million in the three months ended June 30,2008.

 

*Real Estate*:  All of the real estate revenue in the threemonths ended June 30, 2008 was in respect of the Porto Cupecoydevelopment, where revenue is recorded using the percentage of completionmethod.  No condominiums were sold in thequarter.  There was no comparable Cupecoyrevenue in the prior year.  In the threemonths ended June 30, 2007, revenue recorded at Keswick Hall, Virginia,was $0.9 million.  No revenue wasrecorded at Keswick Hall in the current period.

 

*Depreciation and amortization*

 

Depreciation and amortization increased by $0.5million, or 5%, from $9.8 million in the three months ended June 30, 2007to $10.3 million in the three months ended June 30, 2008, primarily due tothe effect of capital expenditures incurred during 2007, and the impact ofexchange rate movements, particularly in respect of the operations of hotelsand trains and cruises outside North America where the functional currency isEuros.

 

*Operating expenses*

 

Operating expenses increased by $13.8 million, or 19%,from $72.0 million in the three months ended June 30, 2007 to $85.8million in the three months ended June 30, 2008.  As a percentage of revenue, operatingexpenses increased from 45% of revenue for the three months ended June 30,2007, to 47% of revenue for the three months ended June 30, 2008.  Exchange rate movements (in particular theyear on year devaluation of the US dollar against the Euro) and local wageinflation caused operating costs across Europe to rise compared to the prioryear when translated into US dollars.

 

*Selling, general and administrative expenses*

 

Selling, general and administrative expenses increasedby $7.6 million, or 18%, from $43.2 million in the three months ended June 30,2007 to $50.8 million in the three months ended June 30, 2008.  The selling, general and administrativeexpenses incurred in the three months ended June 30, 2008 included costs$2.3 million incurred at the Hotel das Cataratas, Brazil, which OEH began tooperate in October 2007.  Excludingthese costs, as a percentage of revenue, selling, general and administrativeexpenses remained at 27% in the current period compared to the three monthsended June 30, 2007.  As noted above,the movement 

 

36

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of the Euro in particular, but also the British poundand the Brazilian real exchange rates, had a significant impact on the selling,general and administrative costs incurred during the quarter.

 

*Segment EBITDA margins*

 
| **Three  months ended June 30**       | ** ** | **2008**                    | ** ** | **2007** |   |
|--------------------------------------------|------------|-----------------------------|------------|----------|--------|
| ** **                                 | ** ** | **(dollars  in thousands)** |       |
| Segment  EBITDA:                           |       |                        |       |     |   |
| Hotels  and restaurants                    |       |                        |       |     |   |
| Owned  hotels                              |       |                        |       |     |   |
| Europe                                     |       | $                           | 34,190     |     | $      | 31,778 |   |
| North  America                             |       | 3,325                       |       | 3,315    |   |
| Rest  of the world                         |       | 3,633                       |       | 5,130    |   |
| Hotel  management/part ownership interests |       | 7,736                       |       | 7,029    |   |
| Restaurants                                |       | 920                         |       | 1,288    |   |
|                                       |       | 49,804                      |       | 48,540   |   |
| Tourist  trains and cruises                |       | 9,826                       |       | 8,712    |   |
| Real  estate                               |       | (463                        | )          | (24      | )      |
| Central  overheads                         |       | (7,159                      | )          | (7,335   | )      |
|                                       |       | $                           | 52,008     |     | $      | 49,893 |   |

 

Althoughsegment EBITDA for the quarter increased by 4% from $49.9 million in 2007 to$52.0 million in 2008, segment EBITDA margins (calculated as segment EBITDA asa percentage of revenue) decreased by 2% from 31% for the three months ended June 30,2007 to 29% for the three months ended June 30, 2008.

 

The Europeanhotels collectively reported a segment EBITDA of $34.2 million compared to$31.8 million in the same period in 2007. As a percentage of revenue, the European segment EBITDA margin declinedfrom 31% in the three months ended June 30, 2007 to 30% in the threemonths ended June 30, 2008.

 

Segment EBITDAin the North American region was $3.3 million in both the current and prioryear periods.  As a percentage ofrevenue, the segment EBITDA margin declined from 11% in the three months ended June 30,2007 to 9% in the three months ended June 30, 2008.

 

Segment EBITDAin the Rest of the World region decreased by $1.5 million from $5.1 million inthe three months ended June 30, 2007 to $3.6 million in the three monthsended June 30, 2008.  The 2008segment margin includes the results of Hotel das Cataratas, Brazil, which OEHhas operated since October 1, 2007 and which is undergoingrefurbishment.  If the results of 

 

37

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this hotel areexcluded, segment EBITDA for the Rest of the World region increased by $0.1million, to $5.2 million for the three months ended June 30, 2008.  The segment EBITDA margin for the threemonths ended June 30, 2008, excluding Hotel das Cataratas, was 16%compared to a margin of 18% for the same period in 2007.

 

*Earnings from operations before net financecosts*

 

Earnings from operations decreased by $0.1 millionfrom a profit of $34.5 million in the three months ended June 30, 2007 toa profit of $34.4 million in the three months ended June 30, 2008, due tothe factors described above.

 

*Net finance costs*

 

Net finance costs decreased by $1.0 million, or 9%,from $9.8 million for the three months ended June 30, 2007 to $8.8 millionfor the three months ended June 30, 2008. The three months ended June 30, 2007 included a foreign exchangegain of $1.2 million compared to a foreign exchange gain of $2.6 million in thethree months ended June 30, 2008. The foreign exchange gain in the current period arose mainly at theCopacabana Palace Hotel, due to the strengthening of the Brazilian real,compared to the US dollar in the quarter. Excluding the foreign exchange items, net finance costs increased by$0.6 million, or 5%, from $10.9 million for the three months ended June 30,2007 to $11.5 million for the three months ended June 30, 2008, due to theimpact of higher average borrowings through the current period.

 

*Provision for income taxes*

 

The provisionfor income taxes increased by $0.9 million, or 11%, from a provision of $8.8million in the three months ended June 30, 2007 to a provision of $9.7million in the three months ended June 30, 2008.  As a percentage of earnings before incometaxes and earnings from unconsolidated companies, the tax rate in the threemonths ended June 30, 2008 was 3% higher than the rate in the priorperiod, at 38%.

 

The provisionfor income taxes of $9.7 million for the three months ended June 30, 2008included a tax provision of $0.5 million in respect of OEH’s FIN 48 liability,compared to a provision of $0.5 million in respect of the FIN 48 liability inthe three months ended June 30, 2007.

 

38

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*Earnings fromunconsolidated companies*

 

Earnings fromunconsolidated companies net of tax increased by $1.6 million, or 38%, from$4.2 million in the three months ended June 30, 2007 to $5.8 million inthe three months ended June 30, 2008. This was mainly due to increased earnings from OEH’s investments inPeru, Charleston and Madrid.  The taxcost associated with earnings from unconsolidated companies was $1.4 million inboth years.

 

*Loss from discontinued operations*

 

The loss from discontinued operations consisted of theloss from Bora Bora Lagoon Resort which is being held for sale.  The hotel results continued to be belowexpectations with net loss increasing from $0.5 million for the three monthsended June 30, 2007 to $2.3 million for the three months ended June 30,2008.

 

**Sixmonths Ended June 30, 2008 compared to Six months Ended June 30, 2007**

 

OEH’s operating results for the six months ended June 30,2008 and 2007, expressed as a percentage of revenue, were as follows:

 
| **Six  months ended June 30,**                  | ** ** | **2008** | ** ** | **2007** | ** ** |
|------------------------------------------------------|------------|----------|------------|----------|------------|
| ** **                                           | ** ** | **%**    | ** ** | **%**    | ** ** |
| Revenue                                              |       |     |       |     |       |
| Hotels  and restaurants                              |       | 85       |       | 86       |       |
| Tourist  trains and cruises                          |       | 12       |       | 14       |       |
| Real  estate                                         |       | 3        |       | 0        |       |
|                                                 |       | 100      |       | 100      |       |
| Expenses                                             |       |     |       |     |       |
| Depreciation  and amortization                       |       | 7        |       | 7        |       |
| Operating                                            |       | 49       |       | 47       |       |
| Selling,  general and administrative                 |       | 32       |       | 31       |       |
| Net  finance costs                                   |       | 7        |       | 8        |       |
| Earnings  before income taxes                        |       | 5        |       | 7        |       |
| Provision  for income taxes                          |       | (2       | )          | (2       | )          |
| Earnings  from unconsolidated companies              |       | 3        |       | 3        |       |
| Net  earnings from continuing operations             |       | 6        |       | 8        |       |
| Net  Losses from discontinued operations, net of tax |       | (1       | )          | (1       | )          |
| Net  earnings as a percentage of revenue             |       | 5        |       | 7        |       |

 

Segment EBITDA of OEH’s operations for thesix months ended June 30, 2008 and 2007 are analyzed as follows (dollarsin millions):

 

39

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| **Six months ended June 30,** | ** ** | **2008** | ** ** | **2007** | ** ** |
|------------------------------------|------------|----------|------------|----------|------------|
|                               |       |     |       |     |       |
| Segment  EBITDA:                   |       |     |       |     |       |
| Owned  hotels:                     |       |     |       |     |       |
| Europe                             |       | $        | 30.4       |     | $          | 28.2 |   |
| North  America                     |       | 10.6     |       | 9.4      |       |
| Rest  of the World                 |       | 16.4     |       | 17.2     |       |
| Hotel  management interests        |       | 13.0     |       | 11.7     |       |
| Restaurants                        |       | 1.6      |       | 2.2      |       |
| Tourist  trains and cruises        |       | 11.4     |       | 9.9      |       |
| Real  estate                       |       | (1.0     | )          | (0.5     | )          |
| Central  overheads                 |       | (14.0    | )          | (13.0    | )          |
| Total  segment EBITDA              |       | $        | 68.4       |     | $          | 65.1 |   |

 

The foregoingsegment EBITDA reconciles to net earnings as follows (dollars in millions):

 
| **Six months ended June 30,**                               | ** ** | **2008**   | ** ** | **2007**   | ** ** |
|------------------------------------------------------------------|------------|------------|------------|------------|------------|
| ** **                                                       | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net  earnings                                                    |       | $          | 15.1       |       | $          | 16.0 |   |
| Add:                                                             |       |       |       |       |       |
| Depreciation  and amortization                                   |       | 20.6       |       | 18.5       |       |
| Net  finance costs                                               |       | 19.7       |       | 20.2       |       |
| Provision  for income taxes                                      |       | 6.2        |       | 6.0        |       |
| Loss  from discontinued operations, net of tax                   |       | 4.2        |       | 1.7        |       |
| Share  of provision for income taxes of unconsolidated companies |       | 2.6        |       | 2.6        |       |
| Segment  EBITDA                                                  |       | $          | 68.4       |       | $          | 65.1 |   |

 

Operating information for OEH’s owned hotels for thesix months ended June 30, 2008 and 2007 is as follows:

 

40

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|                             | ** ** | **Six months ended June 30,** | ** ** | ** ** | ** ** | ** **              | ** ** |
|----------------------------------|------------|------------------------------------|------------|------------|------------|-------------------------|------------|
|                             | ** ** | **2008**                           | ** ** | **2007**   | ** ** | ** **              | ** ** | ** ** | ** ** |
|                             |       |                               |       |       |       |                    |       |   |   |
| Average  Daily Rate (in dollars) |       |                               |       |       |       |                    |       |   |   |
| Europe                           |       | 772                                |       | 639        |       |                    |       |   |   |
| North  America                   |       | 417                                |       | 396        |       |                    |       |   |   |
| Rest  of the world               |       | 283                                |       | 260        |       |                    |       |   |   |
| Worldwide                        |       | 451                                |       | 408        |       |                    |       |   |   |
|                             |       |                               |       |       |       |                    |       |   |   |
| Rooms  Available (in thousands)  |       |                               |       |       |       |                    |       |   |   |
| Europe                           |       | 155                                |       | 154        |       |                    |       |   |   |
| North  America                   |       | 114                                |       | 112        |       |                    |       |   |   |
| Rest  of the world               |       | 233                                |       | 198        |       |                    |       |   |   |
| Worldwide                        |       | 502                                |       | 464        |       |                    |       |   |   |
|                             |       |                               |       |       |       |                    |       |   |   |
| Rooms  Sold (in thousands)       |       |                               |       |       |       |                    |       |   |   |
| Europe                           |       | 83                                 |       | 86         |       |                    |       |   |   |
| North  America                   |       | 77                                 |       | 73         |       |                    |       |   |   |
| Rest  of the world               |       | 144                                |       | 128        |       |                    |       |   |   |
| Worldwide                        |       | 304                                |       | 287        |       |                    |       |   |   |
|                             | ** ** | ** **                         | ** ** | ** ** | ** ** | ** **              | ** ** | ** ** | ** ** |
| Occupancy  (percentage)          |       |                               |       |       |       |                    |       |   |   |
| Europe                           |       | 54                                 |       | 56         |       |                    |       |   |   |
| North  America                   |       | 68                                 |       | 65         |       |                    |       |   |   |
| Rest  of the world               |       | 62                                 |       | 65         |       |                    |       |   |   |
| Worldwide                        |       | 61                                 |       | 62         |       |                    |       |   |   |
|                             | ** ** | ** **                         | ** ** | ** ** | ** ** | ** **              | ** ** | ** ** | ** ** |
| RevPAR  (in dollars)             |       |                               |       |       |       |                    |       |   |   |
| Europe                           |       | 416                                |       | 356        |       |                    |       |   |   |
| North  America                   |       | 282                                |       | 257        |       |                    |       |   |   |
| Rest  of the world               |       | 174                                |       | 168        |       |                    |       |   |   |
| Worldwide                        |       | 273                                |       | 252        |       |                    |       |   |   |
|                             |       |                               |       |       |       | **Change  %** |       |
| Same  Store RevPAR (in dollars)  |       |                               |       |       |       | **Dollars**             | ** ** | **Local  Currency** |   |
| Europe                           |       | 360                                |       | 298        |       | 21                      | %          | 11 | % |
| North  America                   |       | 287                                |       | 262        |       | 10                      | %          | 10 | % |
| Rest  of the world               |       | 193                                |       | 171        |       | 13                      | %          | 11 | % |
| Worldwide                        |       | 268                                |       | 233        |       | 15                      | %          | 11 | % |

 

Same store RevPAR is a comparison based on theoperations of the same units in each period, such as by excluding the effect ofany acquisitions or major refurbishments. The same store data excludes the following operations:

 
|   | Hotel  Cipriani            | Hotel  Splendido        |
|--------|----------------------------|-------------------------|
|   | Villa  San Michele         | Hotel  Caruso Belvedere |
|   | Hôtel de la Cité | La Residencia           |
|   | El Encanto                 | Mount Nelson Hotel      |
|   | Casa de Sierra Nevada      | Hotel das Cataratas     |

 

41

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*Overview*

 

The net earnings for the period were $15.1 million ($0.36per common share) on revenue of $296.0 million compared with net earnings of$16.0 million ($0.38 per common share) on revenue of $253.7 million in theprior year period.

 

*Revenue*

** **
| **Six months ended June 30,**         | ** ** | **2008**                    | ** ** | **2007** | ** ** |
|--------------------------------------------|------------|-----------------------------|------------|----------|------------|
|                                       |       | **(dollars  in thousands)** |       |
| Revenue:                                   |       |                        |       |     |       |
| Hotels  and restaurants                    |       |                        |       |     |       |
| Owned  hotels                              |       |                        |       |     |       |
| Europe                                     |       | $                           | 112,813    |     | $          | 98,114 |   |
| North  America                             |       | 50,390                      |       | 45,124   |       |
| Rest  of the world                         |       | 71,607                      |       | 58,697   |       |
| Hotel  management/part ownership interests |       | 5,825                       |       | 5,298    |       |
| Restaurants                                |       | 10,154                      |       | 10,938   |       |
|                                       |       | 250,789                     |       | 218,171  |       |
| Tourist  trains and cruises                |       | 36,721                      |       | 34,608   |       |
| Real  estate                               |       | 8,526                       |       | 847      |       |
|                                       |       | $                           | 296,036    |     | $          | 253,626 |   |

 

Total revenuesincreased by $42.4 million, or 17%, from $253.6 million in the six months endedJune 30, 2007 to $296.0 million in the six months ended June 30,2008.  Hotels and restaurants revenueincreased by $32.6 million, or 15%, from $218.2 million in the six months endedJune 30, 2007 to $250.8 million in the six months ended June 30,2008.  Tourist trains and cruisesrevenues increased by $2.1 million, or 6%, from $34.6 million for the sixmonths ended June 30, 2007 to $36.7 million for the six months ended June 30,2008.  Real estate revenues increased by$7.7 million from $0.8 million for the six months ended June 30, 2007 to$8.5 million for the six months ended June 30, 2008.

 

The increasein hotel revenue year on year was due primarily to the impact of exchange ratefluctuations in Europe and the Rest of the World region, backed up by increasedroom rates across the group and additional occupancy in North America, Asia andRussia.

 

The revenuefrom restaurants decreased by $0.7 million, or 7%, from $10.9 million in thesix months ended June 30, 2007 to $10.2 million in the six months ended June 30,2008.

 

42

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*Owned hotels:*  For owned hotels overall, same store RevPARin US dollars increased by 15% in the six months ended June 30, 2008compared to the six months ended June 30, 2007.  Measured in local currency this increase insame store RevPAR was 11%.

 

The change in revenue at owned hotels is analyzed on aregional basis as follows:

 

*Europe*

 
| **Six months ended June 30,** | ** ** | **2008**   | ** ** | **2007**   | ** ** |
|------------------------------------|------------|------------|------------|------------|------------|
| ** **                         | ** ** | ** ** | ** ** | ** ** | ** ** |
| Average  daily rate (in dollars)   |       | 772        |       | 639        |       |
| Rooms  available (in thousands)    |       | 155        |       | 154        |       |
| Rooms  sold (in thousands)         |       | 83         |       | 86         |       |
| Occupancy  (percentage)            |       | 54         |       | 56         |       |
| RevPAR  (in dollars)               |       | 416        |       | 356        |       |
| Same  store RevPAR (in dollars)    |       | 360        |       | 378        |       |

 

Revenueincreased by $14.7 million, or 15%, from $98.1 million for the six months endedJune 30, 2007 to $112.8 million for the six months ended June 30,2008.  The Grand Hotel Europe revenuesgrew by $8.9 million, or 40%, from $22.1 million for the six months ended June 30,2007 to $31.0 million for the six months ended June 30, 2008.  Of the increased revenue, $6.3 million wasdue to average rate improvements of 37% coupled with increased occupancy up 5%compared with the prior year.  Exchangerate movements were responsible for the other $2.6 million of revenue growth inthe period.

 

In Italy,revenues at the Hotel Splendido increased by $0.7 million, or 7%, to $11.6 millionin the six months ended June 30, 2008, but this was offset by a drop inrevenues of $0.5 million at the Villa san Michele and a decrease of $0.2million at Hotel Cipriani. Revenues at these hotels were $5.3 million and $16.4million, respectively, in the six months ended June 30,2008.  Revenues at the Hotel Caruso were unchangedat $5.5 million.  Without the positiveeffect of exchange rate movements in the six months ended June 30, 2008compared to the six months ended June 30, 2007 of $5.1 million, revenuesat the four Italian hotels collectively would have been $5.1 million lower inthe current period than in the prior year, reflecting a decline in occupancy of12% across the four properties.

 

Revenue at LaResidencia increased by $2.0 million, or 37%, from $5.5 million for the sixmonths ended June 30, 2007 to $7.5 million for the six months ended June 30,2008.  Of the increased revenue, $1.0million was due to exchange rate movements with $1.0 million of the revenuegrowth due to average rate improvements and improved occupancy.  Revenue at 

 

43

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Le Manoir auxQuat’Saisons grew by $1.0 million, or 10%, from $10.7 million for the sixmonths ended June 30, 2007 to $11.7 million for the six months ended June 30,2008.  This revenue increase was solelydue to average rate, including non-room revenue, and occupancy improvements.

 

Revenue atReids Palace, Madeira increased by $2.0 million, to $13.5 million for the sixmonths ended June 30, 2008, from $11.5 million in the prior year.  Revenues at Lapa Palace, Lisbon and Hotel dela Cite, Carcassonne, increased by $0.4 million and $0.2 million, respectively,to $6.8 million and $3.4 million, respectively, for the six months ended June 30,2008.  These revenue improvements wereall the result of exchange rate movements. Had the Euro to US dollar exchange rate for the six months ended June 30,2008 been the same as in the six months ended June 30, 2007, revenues atthese three properties collectively would have been $0.5 million lower than thecombined revenues of $23.7 million reported in the six months ended June 30,2007.

 

On a samestore basis across the European hotels, RevPAR in local currency increased by11% which translates to a 21% increase in US dollars.

 

*North America*

 
| **Six months ended June 30,** | ** ** | **2008** | ** ** | **2007** | ** ** |
|------------------------------------|------------|----------|------------|----------|------------|
|                               |       |     |       |     |       |
| Average  daily rate (in dollars)   |       | 417      |       | 396      |       |
| Rooms  available (in thousands)    |       | 114      |       | 112      |       |
| Rooms  sold (in thousands)         |       | 77       |       | 73       |       |
| Occupancy  (percentage)            |       | 68       |       | 65       |       |
| RevPAR  (in dollars)               |       | 282      |       | 257      |       |
| Same  store RevPAR (in dollars)    |       | 287      |       | 262      |       |

 

Revenueincreased by $5.3 million, or 12%, from $45.1 million in the six months ended June 30,2007 to $50.4 million in the six months ended June 30, 2008.  Revenue at Inn at Perry Cabin, Maryland,increased by $0.9 million, or 23% from $4.2 million for the six months ended June 30,2007 to $5.1 million for the six months ended June 30, 2008.  Windsor Court Hotel in New Orleans recorded a$0.6 million, or 5%, increase in revenue to $13.8 million for the six monthsended June 30, 2008.

 

Revenue atMaroma Resort and Spa, Mexico increased by $1.8 million, or 19%, from $8.9million for the six months ended June 30, 2007 to $10.7 million for thesix months ended June 30, 2008, reflecting average rate improvements of12% and increased occupancy, up 2% for the six months ended June 30,

 

44

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2008 comparedto the same period in 2007.  Revenue atCasa de Sierra Nevada, Mexico increased by $0.8 million, to $1.7 million in thesix months ended June 30, 2008.  Part ofthe hotel was closed for renovation during the six months ended June 30,2007.

 

Revenue at LaSamanna, St Martin increased by $1.0 million, or 8%, to $13.8 million in thesix months ended June 30, 2008, while revenue at Keswick Hall, Virginiaimproved by $0.1 million from $5.1 million in the six months ended June 30,2007 to $5.2 million in the six months ended June 30, 2008.

 

Across all ofthe North American properties, on a same store basis RevPAR increased by10%.  Average occupancy was 68% in thesix months ended June 30, 2008, compared to 65% in the same period in2007.

 

*Rest of the World*

 
| **Six months ended June 30,** | ** ** | **2008**   | ** ** | **2007**   | ** ** |
|------------------------------------|------------|------------|------------|------------|------------|
| ** **                         | ** ** | ** ** | ** ** | ** ** | ** ** |
| Average  daily rate (in dollars)   |       | 283        |       | 260        |       |
| Rooms  available (in thousands)    |       | 233        |       | 198        |       |
| Rooms  sold (in thousands)         |       | 144        |       | 128        |       |
| Occupancy  (percentage)            |       | 62         |       | 65         |       |
| RevPAR  (in dollars)               |       | 174        |       | 168        |       |
| Same  store RevPAR (in dollars)    |       | 193        |       | 171        |       |

 

ExcludingHotel das Cataratas, Brazil, which OEH started to operate on October 1,2007 and which recorded revenue of $4.9 million in the six months ended June 30,2008, revenue in the Rest of the World region increased by $8.0 million, or 14%from $58.7 million for the six months ended June 30, 2007 to $66.7 millionfor the six months ended June 30, 2008. Revenue at the Copacabana Palace, Brazil increased by $2.9 million, or16%, to $21.1 million for the six months ended June 30, 2008. All of thisincrease was due to the effect of exchange rate movements between the BrazilianReal and US dollar.

 

Revenue at OEH’stwo Australian properties increased by $1.5 million, or 14%, from $10.8 millionfor the six months ended June 30, 2007 to $12.3 million for the six monthsended June 30, 2008.  The increasewas also all due to exchange rate movements between the Australian and USdollars. Southern Africa revenues increased by $1.0 million to $19.9 millionfor the six months ended June 30, 2008. Revenue at the Mount Nelson, Cape Town increased by $0.3 million andincreased by $0.1 million at the Westcliff, Johannesburg to $11.1 million and$4.9 million, respectively.  Revenue atOrient-Express Safaris, Botswana, increased by $0.6 million to $3.8 million.

 

45

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The increasedrevenue in both South Africa and Botswana was the result of improvedtrading.  Average rate increases morethan compensated for a slight fall in occupancy across the three properties.  Exchange rate movements had a negative impacton revenue, year on year of $1.2 million. Accordingly, the improvement was $2.2 million for the six months ended June 30,2008 compared to the prior year.

 

OEH’s sixAsian hotels collectively increased revenues by $2.0 million, or 27%, from $7.2million in the six months ended June 30, 2007 to $9.2 million in the sixmonths ended June 30, 2008.  Thisincludes a decrease in revenue at The Governors Residence, Yangon, whichdeclined by $0.2 million to $0.5 million following the cyclone that struck thecountry in May 2008 which resulted in the hotel being closed for part ofthe quarter.  Excluding The GovernorsResidence, all of the Asian hotels recorded good revenue growth due to higheraverage rates, up 42% compared to the prior year, and occupancy, up 4%.  Exchange rate movements had only a minimaleffect on the Asian hotel revenues.

 

The Rest ofthe World region RevPAR, on a same store basis, increased by 11% in localcurrencies in the six months ended June 30, 2008 compared to the sixmonths ended June 30, 2007. This translates to a same store RevPARincrease of 13% when expressed in US dollars.

 

*Hotel Management andPart-Ownership Interests: *Revenue increased by $0.5million from $5.3 million in the six months ended June 30, 2007 to $5.8million in the six months ended June 30, 2008.  Revenue earned from the managed hotel inMadrid increased by $0.2 million, or 24%, to $0.8 million for the six monthsended June 30, 2008.  Revenue earnedfrom the managed hotels in Peru increased by $0.3 million, or 21% to $2.1million for the six months ended June 30, 2008.

 

*Restaurants*:  Revenue decreased by $0.8 million, from $10.9million in the six months ended June 30, 2007 to $10.1 million in the sixmonths ended June 30, 2008.  Revenueat ‘21’ Club in New York fell by $1.0 million, or 9%, to $9.3 million in thesix months ended June 30, 2008, due to a reduced volume of corporateevents.  Revenues at La Cabana, BuenosAires, Argentina, increased by $0.2 million, to $0.9 million for the six monthsended June 30, 2008.

 

*Trains and Cruises: *Revenue increased by $2.1 million, from$34.6 million in the six months ended June 30, 2007 to $36.7 million inthe six months ended June 30, 2008. Excluding revenues for the Road to Mandalay river cruiseship in Burma,which fell by $0.8 million following the cyclone that struck the country in May 2008,revenues increased by $2.9 million. 

 

46

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VeniceSimplon-Orient-Express revenues increased by $2.8 million, or 24%, from $11.4million for the six months ended June 30, 2008 to $14.2 million for thesix months ended June 30, 2008.

 

*Real Estate*:  Revenues in the six months ended June 30,2008 recorded in respect of the Porto Cupecoy development, using the percentageof completion basis, were $8.2 million. There were no comparable Cupecoy revenues in the prior year.  In the six months ended June 30, 2008,revenues recorded at Keswick Hall, Virginia, were $0.3 million, $0.5 millionlower than in the six months ended June 30, 2007.

 

*Depreciation and amortization*

 

Depreciation and amortization increased by $2.1million, or 11%, from $18.5 million in the six months ended June 30, 2007to $20.6 million in the six months ended June 30, 2008, primarily due tothe effect of capital expenditures incurred during 2007, and the impact ofexchange rate movements, particularly in respect of the operations of hotelsand trains and cruises outside North America where the functional currency iseither Euros or British pounds.

 

*Operating expenses*

 

Operating expenses increased by $25.4 million, or 21%,to $145.5 million in the six months ended June 30, 2008.  As a percentage of revenue, operatingexpenses increased from 45% of revenue for the six months ended June 30,2007 to 49% of revenue for the six months ended June 30, 2008.  Exchange rate movements (in particular theyear on year devaluation of the US dollar against the Euro) and local wageinflation caused operating costs across Europe to rise compared to the prioryear when translated into US dollars.

 

*Selling, general and administrative expenses*

 

Selling, general and administrative expenses increasedby $17.0 million, or 22%, from $77.6 million in the six months ended June 30,2007 to $94.6 million in the six months ended June 30, 2008.  The selling, general and administrativeexpenses incurred in the six months ended June 30, 2008 included costs of$4.5 million incurred at the Hotel das Cataratas, Brazil, which OEH began tooperate in October 2007.  Excludingthese costs, as a percentage of revenue, selling, general and administrativeexpenses remained at 31% in the six months ended June 30, 2007 and the sixmonths ended June 30, 2008.  Asnoted above, the movement of the Euro in particular, but also the British poundand the Brazilian real exchange rates, had a significant impact on the selling,general and administrative costs incurred during the quarter.

 

47

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*Segment EBITDA margins*

 
| **Six  months ended June 30**         | ** ** | **2008**                    | ** ** | **2007** | ** ** |
|--------------------------------------------|------------|-----------------------------|------------|----------|------------|
| ** **                                 | ** ** | **(dollars  in thousands)** | ** ** |
| Segment  EBITDA:                           |       |                        |       |     |       |
| Hotels  and restaurants                    |       |                        |       |     |       |
| Owned  hotels                              |       |                        |       |     |       |
| Europe                                     |       | $                           | 30,446     |     | $          | 28,223 |   |
| North  America                             |       | 10,625                      |       | 9,435    |       |
| Rest  of the world                         |       | 16,380                      |       | 17,214   |       |
| Hotel  management/part ownership interests |       | 12,954                      |       | 11,676   |       |
| Restaurants                                |       | 1,569                       |       | 2,156    |       |
|                                       |       | 71,974                      |       | 68,704   |       |
| Tourist  trains and cruises                |       | 11,369                      |       | 9,860    |       |
| Real  estate                               |       | (960                        | )          | (482     | )          |
| Central  overheads                         |       | (13,958                     | )          | (13,016  | )          |
|                                       |       | $                           | 68,425     |     | $          | 65,066 |   |

 

Althoughsegment EBITDA for the quarter increased by 5% from $65.1 million in 2007 to$68.4 million in 2008, segment EBITDA margins (calculated as segment EBITDA asa percentage of revenue) decreased by 3% from 26% for the six months ended June 30,2007 to 23% for the six months ended June 30, 2008.

 

The Europeanhotels collectively reported a segment EBITDA of $30.4 million compared to$28.2 million in the same period in 2007. As a percentage of revenue, the European segment EBITDA margin declinedfrom 22% in the six months ended June 30, 2007 to 21% in the six monthsended June 30, 2008.

 

Segment EBITDAin the North American region was $9.4 million in the six months ended June 30,2007 and increased by $1.2 million to $10.6 million in the six months ended June 30,2008.  As a percentage of revenue, thesegment EBITDA margin declined from 16% in the six months ended June 30,2007 to 15% in the six months ended June 30, 2008.

 

Segment EBITDAin the Rest of the World region decreased by $0.8 million from $17.2 million inthe six months ended June 30, 2007 to $16.4 million in the six monthsended June 30, 2008.  The 2008segment margin includes the results of Hotel das Cataratas, Brazil, which OEHhas operated since October 1, 2007 and which is undergoingrefurbishment.  If the Cataratas result(a loss of $1.7 million) is excluded, segment EBITDA 

 

48

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for the Restof the World region increased by $0.9 million, to $18.1 million for the sixmonths ended June 30, 2008.  Thesegment EBITDA margin for the six months ended June 30, 2008, excludingHotel das Cataratas, was 27% compared to a margin of 35% for the same period in2007.

 

*Earnings from operations before net financecosts*

 

Earnings from operations decreased by $2.1 millionfrom a profit of $37.4 million in the six months ended June 30, 2007 to aprofit of $35.3 million in the six months ended June 30, 2008, due to thefactors described above.

 

*Net finance costs*

 

Net finance costs decreased by $0.5 million, or 2%,from $20.2 million for the six months ended June 30, 2007 to $19.7 millionfor the six months ended June 30, 2008. The six months ended June 30, 2007 included a foreign exchange gainof $1.3 million compared to a foreign exchange gain of $4.7 million in the sixmonths ended June 30, 2008.  Theforeign exchange gain in the current period arose mainly from US dollar debt atthe Grand Hotel Europe, due to the strengthening of the ruble, and gains at theCopacabana Palace Hotel due to strengthening of the Brazilian real.  Excluding the foreign exchange items, netfinance costs increased by $3.0 million, or 14%, from $21.4 million for the sixmonths ended June 30, 2007 to $24.4 million for the six months ended June 30,2008, due to the impact of financing new investments the currency impact ofnon-US dollar borrowings and higher average borrowings throughout the periodcompared with the prior year.

 

*Benefit from income taxes*

 

The provisionfor income taxes increased by $0.2 million, from a provision of $6.0 million inthe six months ended June 30, 2007 to a provision of $6.2 million in thesix months ended June 30, 2008.  Asa percentage of earnings before income taxes and earnings from unconsolidatedcompanies, the tax rate in the six months ended June 30, 2008 was 4%higher than the rate in the prior period, at 39%.

 

The provisionfor income taxes of $6.2 million for the six months ended June 30, 2008included a tax provision of $0.8 million in respect of OEH’s FIN 48 liability,compared to a provision of $0.7 million in respect of the FIN 48 liability inthe six months ended June 30, 2007.

 

49

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*Earnings fromunconsolidated companies*

 

Earnings fromunconsolidated companies net of tax increased by $3.4 million from $6.5 millionin the six months ended June 30, 2007 to $9.9 million in the six monthsended June 30, 2008.  This wasmainly due to increased earnings from OEH’s investments in Peru, Charleston andMadrid.  The tax cost associated withearnings from unconsolidated companies was $2.6 million in both years.

 

*Loss from discontinued operations*

 

The loss from discontinued operations consisted of theloss from Bora Bora Lagoon Resort which is being held for sale.  The hotel results continued to be belowexpectations with net loss increasing from $1.7 million for the six months endedJune 30, 2007 to $4.2 million for the six months ended June 30, 2008.

 

**Liquidity and Capital Resources**

 

*Working Capital*

 

OEH had cash and cash equivalents of $65.8 million at June 30,2008, $24.8 million less than the $90.6 million at December 31, 2007.  In addition to this, it had restricted cashof $7.5 million (2007 - $3.8 million) mainly related to the Porto Cupecoyproject in St. Martin, which will be released when the next 12.5% phase ofconstruction is completed.  At June 30,2008, there were undrawn amounts available to OEH under committed short-termlines of credit of $16.8 million and undrawn amounts available to OEH undersecured revolving credit facilities of $28.5 million, bringing total cashavailability at June 30, 2008 to $111.1 million.

 

Current assets less current liabilities, including thecurrent portion of long-term debt, resulted in a working capital balance of$17.5 million at June 30, 2008, a decrease of $17.8 million from a balanceof $35.3 million at December 31, 2007. The main factor that contributed to the decrease in working capital wasthe increased use of cash for financing capital projects.

 

*Cash Flow*

 

*Operating Activities*.  Net cash provided by operating activitiesdecreased by $3.1 million from $25.4 million for the six months ended June 30,2007 to $22.3 million for the six months ended June 30, 2008.  This was mainly due to the cash used at BoraBora Lagoon Resort and movements in working capital balances.

 

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*Investing Activities*.  Cash used in investing activities decreasedby $7.6 million to $58.1 million for the six months ended June 30, 2008,compared to $65.7 million for the six months ended June 30, 2007.

 

This was mainly due to the lower acquisitions andinvestments.   Current six monthsacquisitions of $3.3 million included the acquisition of the 20% minorityinterest in Casa de Sierra Nevada, and the La Samanna spa acquisition.  The 2007 acquisitions included the finalpayment for the Grand Hotel Europe, La Residence d’Angkor minority interestacquisition, acquisitions of Afloat in France and the Royal Scotsman,acquisition of internet website intangible assets, and investments in Buzios.

 

Capital expenditure of $50.2 million included $6.9million of Hotel Cipriani refurbishment, $6.4 million of Grand Hotel Europerefurbishment, $6.0 million of El Encanto construction costs, $4.1 million ofconstruction of assets at Cupecoy, $2.4 million at Hotel das Cataratas, $2.2million at La Residencia, as well as smaller capital expenditures across manyother properties.

 

The $3.7 million increase in restricted cashrepresented the net movement in the escrow account used in the Cupecoy propertydevelopment.

 

*Financing Activities*.  Cash provided by financing activities for thesix months ended June 30, 2008 was $10.9 million compared to $47.3 millionfor the six months ended June 30, 2007, a decrease of $36.4 million.  The main factor that contributed to thisdecrease was the repayment of a number of working capital facilities undertakenduring 2008 to reduce interest costs.

 

*Capital Commitments*.  There were $128.1 million of capitalcommitments outstanding as of June 30, 2008 relating mainly to investmentsin owned hotels and the Porto Cupecoy property development, and the purchase ofland and a building adjoining ‘21’ Club, New York.

 

*Indebtedness*

 

At June 30, 2008, OEH had $835.2 million of long-termdebt secured by assets, including the current portion, which is repayable overperiods of 1 to 11 years with a weighted average maturity of 3.9 years and aweighted average interest rate of 5.54%**.**  See Note 8 to the financial statementsregarding the maturity of long-term debt.

 

Approximately 55% of the outstanding principal wasdrawn in European euros and the balance primarily in US dollars.  At June 30, 2008, 58% of borrowings ofOEH were in floating interest rates.

 

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*Liquidity*

 

OEH’s capitalcommitments, as reported above, amount to $128.1 million.  In addition, OEH has signed letters of intentthat would result in additional commitments, initially amounting to $59million, including $40 million relating to OEH’s planned New York hotelproject, and $19 million for certain hotel developments with The Related Group,a prominent real estate developer in the United States and Latin America.  OEH is currently discussing with its advisorson the most appropriate way of financing these additional commitments.  Options available to OEH include raisingadditional debt at property level, issuing debt instruments, issuing equity, ora combination of any of the foregoing.

 

OEH expects to have available cash from operations andappropriate debt finance sufficient to fund its working capital requirements,committed capital expenditures, committed acquisitions and debt service for theforeseeable future.

 

**Recent Accounting Pronouncements**

 

As of June 30,2008, the Company’s adoption of recent accounting pronouncements, which aredescribed in Note 1 to the financial statements in the Company’s 2007 Form 10-Kannual report, has not changed from December 31, 2007, except for adoptionof SFAS No. 157 and 159 as described in Note 1(a) to the financialstatements in this report and except as follows:

 

*SFAS 161*

 

In March 2008, the FASB issued SFAS No. 161 “Disclosuresabout Derivative Instruments and Hedging Activities — An Amendment of FASBStatement No. 133”.  This statementchanges the disclosure requirements for derivative instruments and hedgingactivities.  Entities are required toprovide enhanced disclosures about (a) how and why an entity usesderivative instruments, (b) how derivative instruments and related hedgeditems are accounted for under SFAS No. 133 and its relatedinterpretations, and (c) how derivative instruments and related hedgeditems affect an entity’s financial position, financial performance, and cashflows.  SFAS No. 161 is effectivefor financial statements issued for fiscal years and interim periods beginningafter November 15, 2008.  TheCompany is in the process of evaluating the effects of the adoption of SFAS No. 161.

 

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## **Critical Accounting Policies**

## ** **

For adiscussion of these, see under the heading “Critical Accounting Policies” inItem 7 — Management’s Discussion and Analysis in the Company’s 2007 Form 10-Kannual report.

 

**ITEM3.****                                                    ****Quantitativeand Qualitative Disclosures about Market Risk**

 

OEH is exposed to market risk from changes in interestrates and foreign currency exchange rates. These exposures are monitored and managed as part of OEH’s overall riskmanagement program, which recognizes the unpredictability of financial marketsand seeks to mitigate material adverse effects on consolidated earnings andcash flows.  OEH does not hold marketrate sensitive financial instruments for trading purposes.

 

The market risk relating to interest rates arisesmainly from the financing activities of OEH. Earnings are affected by changesin interest rates on borrowings, principally based on US dollar LIBOR andEURIBOR, and on short-term cash investments. If interest rates increased by 10%, with all other variables heldconstant, annual net finance costs of OEH would have increased by approximately$3,300,000 on an annual basis based on borrowings at June 30, 2008. Theinterest rates on substantially all of OEH’s long-term debt are adjustedregularly to reflect current market rates. Accordingly, the carrying amounts approximate fair value.

 

The market risk relating to foreign currencies and itseffects have not changed materially during the first six months of 2008 fromthose described in the Company’s 2007 Form 10-K annual report.

 

**ITEM 4.  Controlsand Procedures**

 

The Company’s management, under the supervision and with theparticipation of its chief executive and financial officers, has evaluated theeffectiveness of the Company’s disclosure controls and procedures (as definedin SEC Rule 13a-15(e)) as of June 30, 2008 and, based on thatevaluation, believes those disclosure controls and procedures are effective asof that date.  There have been no changesin the Company’s internal control over financial reporting (as defined in SEC Rule 13a-15(f))during the second quarter of 2008 that have materially affected, or arereasonably likely to materially affect, the Company’s internal control overfinancial reporting.

 

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It should be noted that any system of controls, however well designedand operated, can provide only reasonable, and notabsolute,assurance that the objectives of the system are met such as prevention anddetection of mis-statement.  In addition,the design of any control system is based in part upon certain assumptionsabout the likelihood of future events. Controls may become inadequate because of changes in conditions, or thedegree of compliance with policies or procedures may deteriorate, forexample.  Because of these and otherinherent limitations of control systems, there can be no assurance that anydesign will succeed in achieving its stated goals under all potential futureconditions.

** **

**54**

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** **

**PART II - OTHER INFORMATION**

 

**ITEM4.          Submission of Matters to aVote of Security Holders**

# ** **

# **The Company convened andheld an annual general meeting of shareholders on June 4, 2008.  The holders of Class A and B commonshares, voting together, elected directors of the Company and appointedDeloitte & Touche LLP as the Company’s independent auditor.  A brief description of each matter and thenumber of votes on each matter are as follows:**

# ** **

# **(1)**                                  Election ofseven directors, to constitute the entire Board of Directors, serving until the2009 annual general meeting:

 

| ** **        | ** ** | ** **     | ** ** | **Authority** |
|-------------------|------------|----------------|------------|---------------|
| **Name**          | ** ** | **For**        | ** ** | **Withheld**  |
| ** **        | ** ** | ** **     | ** ** | ** **    |
| **J.D. Campbell** | ** ** | **20,269,879** | ** ** | **1,331,538** | ** ** |
| **J.B. Hurlock**  | ** ** | **20,821,392** | ** ** | **780,025**   | ** ** |
| **P.M. Leith**    | ** ** | **20,298,459** | ** ** | **1,302,958** | ** ** |
| **J.R. Lovejoy**  | ** ** | **20,821,216** | ** ** | **780,201**   | ** ** |
| **G.R. Rafael**   | ** ** | **20,821,458** | ** ** | **779,959**   | ** ** |
| **J.B. Sherwood** | ** ** | **20,312,167** | ** ** | **1,289,250** | ** ** |
| P.M. White        |       | 20,323,440     |       | 1,277,977     |   |

 

 

# **(2)**                                  Appointmentof Deloitte & Touche LLP as the Company’s independent registeredpublic accounting firm, and authorization of the Board’s Audit Committee to fixDeloitte’s remuneration:  For 20,994,103,Against 269,247, and Abstain 338,067.

# ** **

**ITEM5.          Other Information**

 

At the June 4,2008 annual general meeting of the Company, a shareholder read a statement anddelivered a letter challenging the Company’s corporate governance structure asit relates to the ownership and voting of the Class B common shares. This shareholder and another shareholder further challenged the Company’scorporate governance structure in a letter to the Board of Directors dated July 24,2008.

 

The Companyresponded to these shareholders by letter dated August 1, 2008.  Inthis letter, the Company expressed its strong disagreement with theshareholders’ suggestion that the corporate governance structure is not permissibleby law.  The Company also stated that its corporate governance structurehas been thoroughly analyzed by legal counsel and the Company is confident thatthe structure is valid and proper under Bermuda law.  The Company furtherstated that its corporate governance structure has been in place since theCompany became a public company in 2000, has been fully described in theCompany’s public filings and clearly disclosed to investors considering buyingthe Company’s shares.

 

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On August 4,2008, the Company received a letter from these shareholders reiterating theirobjections to the Company’s corporate governance structure and expressing anintent to deliver a requisition calling for a special shareholders meeting togive the holders of the Class A common shares the opportunity to expresstheir views on whether the Company’s current governance structure should berevised.

 

To date, theCompany has not received any such requisition, and no further developments withrespect to this matter have occurred.  The Company strongly believes thatthis challenge is without merit and that its corporate governance structurefully complies with Bermuda law.

 

# **ITEM6.  Exhibits**

# ** **

The index toexhibits appears below, on the page immediately following the signature page tothis report.

 

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**SIGNATURES**

 

Pursuant tothe requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.

 
|   | ORIENT-EXPRESS  HOTELS LTD.    |
|--------|--------------------------------|
|   |                           |
|   | By:                            | /s/  Martin O’Grady |
|   | Martin O’Grady            |
|   | Vice President — Finance  |
|   | and Chief Financial Officer    |
|   | (Principal Accounting Officer) |

 

Dated: August 11,2008

 

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# **EXHIBIT INDEX**

# ** **

3.1                               —                                   Memorandum of Association andCertificate of Incorporation of the Company, filed as Exhibit 3.1 to theCompany’s Form 8-K Current Report on July 9, 2007 and incorporatedherein by reference.

 

3.2                                 —                                   Bye-Laws of the Company, filedas Exhibit 3 to the Company’s Form 8-K Current Report on June 20,2007 and incorporated herein by reference.

 

3.3                                 —                                   Rights Agreement dated as of June 1,2000, and amended and restated as of April 12, 2007, between the Companyand Computershare Trust Company, N.A., as rights agent, filed as Exhibit 1to Amendment No. 1 to the Company’s Registration Statement on Form 8-Adated April 23, 2007, for the Company’s preferred share purchase rights,and incorporated herein by reference.

 

3.4                                 —                                   Amendment No. 1 dated December 10,2007 to amended and restated Rights Agreement (Exhibit 3.3), filed as Exhibit 4.2to the Company’s Form 8-K Current Report on December 10, 2007 andincorporated herein by reference.

 

31                                    —                                   Rule 13a-14(a)/15d-14(a) Certifications.

 

32                                    —                                   Section 1350Certification.

 

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